A SHARP DECELERATION

The U.S. labor market is exhibiting some worrisome trends with a sharp deceleration in jobs growth, evident in the August nonfarm payroll report. The U.S. economy added only 22,000 jobs during the month — well below expectations of a relatively weak increase of 77,000. There were notable job losses in manufacturing and very anemic gains in healthcare, which had been a meaningful tailwind to labor demand. The unemployment rate climbed to 4.3%, and the June data was revised to show a loss of 13,000 jobs, which was the first negative jobs print since December 2020. This brought the three-month moving average for job creation to only 30,000. While the unemployment rate ticked higher in the aggregate, it is worth noting that the unemployment rate for 16- to 24-year-olds sits at over 10%, reflecting the difficulty that college graduates and other young workers are facing in today’s labor market.

Interestingly, wages were fairly steady: Average hourly earnings rose 0.3% month-over-month and were up 3.7% at an annualized rate. This is slightly down from July’s pace of 3.9%, but not at a level that suggests significant weakness. It may be that, just as demand for labor has eased, supply has also eased due to tighter immigration policies.

Fed Chair Powell’s Jackson Hole speech and recent comments from FOMC members suggest that weakening jobs data will be more influential on monetary policy than fears of higher tariff-related inflation, which is assumed to be fleeting. The Fed’s focus will be on the slowdown in job creation, and this should be enough to urge them to ease policy in September. The market is now pricing in two to three rate cuts through the end of the year: This is slightly more aggressive than before the jobs report was released, which seems reasonable. The data-dependent Fed now has a few months of data reflecting weakness in the foundation of the U.S. economy — jobs. Moreover, the weakness in the labor market may prompt criticism that the Fed is behind the curve.

U.S. equity markets continue to reach and breach record highs, buoyed by strong corporate earnings, intense momentum behind AI-related stocks, and expectations of easier monetary policy going forward. Since June, the S&P 500  advanced over 5% through yesterday’s close, with growth stocks outperforming their value counterparts by roughly 1%. The 6.7% advance of the NASDAQ  reflects investors’ continued preference for growth stocks, particularly in the tech sector. Interestingly, small caps have finally gotten attention, and their nearly 10% gain since June has come after a long period of underperformance. Lower interest rates are considered to be a tailwind to these companies, which tend to be more highly leveraged, and the general “risk-on” tone of the market is also supportive of the riskiest stocks.

Although non-U.S. stocks continue to post impressive results, the relative performance since June favors the U.S.: Broad Emerging Market indices have advanced 3.8% since June and Developed ex-U.S. benchmarks have gained just over 2%.

August performance was mixed, with global real estate and global natural resources outperforming global equities, while global listed infrastructure and commodities lagged. Listed infrastructure underperformed broader equities, with strong performance in non-U.S. sectors while the U.S. component ended August in the red. While lower interest rates on the shorter end of the yield curve was a tailwind to certain asset classes, stubbornly high longer-term rates had a negative impact on infrastructure. Finally, natural resources had strong results globally, with metals and mining providing performance tailwinds.