Good morning,
Friday’s August employment report came in weaker than already low expectations—disappointing equity markets but giving bond investors some comfort. Even so, the damage to stocks was modest, with the S&P 500 Index finishing down just –0.30% on the day and up +0.37% for the week. Traders quickly reframed the weak jobs data as justification for the Fed to deliver a double rate cut next week.
The key question now is whether the “bad news is good news” trade is nearing its limits. At what point does a rapidly weakening labor market outweigh the benefits of easier monetary policy?
This week’s main events are Wednesday’s PPI and Thursday’s CPI. Barring a major surprise, it’s difficult to envision a CPI print strong enough to prevent the Fed from cutting rates. Current probabilities stand at 90% for one cut and 10% for two.
Meanwhile, the early effects of higher tariffs are beginning to surface. If the trend continues, we can expect data to show slower growth alongside persistent price pressures—a stagflationary setup. With equity markets at new highs, vulnerability to this mix is elevated.
I’ll be publishing a monthly letter midweek to expand on these risks as we look toward year-end.
Be well,
Mike