Job Market Slowing; Rate Cuts To The Rescue

Stocks continue to push higher toward record levels despite political/geopolitical nonsense—and even in the face of a weaker job market report released this morning. The S&P 500, Dow, and Nasdaq all gained ~1% in today’s session.

It is becoming increasingly clear that the labor market is softening a bit. For a while we’ve been referring to the job market has “no fire, no hire.” But new layoff announcements are trickling in (i.e. COP, CRM). Some of this is AI-related, targeting the software sector. Evan Sohn of Aura Intelligence says, “If you have AI that can do a great job coding, [you] need fewer people coding.” Payroll processor ADP estimates the economy generated only 54,000 new jobs last month, roughly half of recent pace. Friday’s nonfarm payrolls report looms large.

The stock market remains on an even keel, however, because sometimes bad news is good news. In this case slower hiring activity boosted conviction among investors that the Federal Reserve will cut interest rates at its next meeting on September 17th. Remember, they use rates as a tool to control inflation and keep the economy at full employment. Investors clearly see lower rates as outweighing near-term job softness.

Also, they’re focusing on resilient consumer demand and strong corporate earnings beats rather than labor cracks. The ISM Services Index, a closely-watched survey of business activity, reaccelerated to 52.0 in August from 50.1 in July. In plain English, the report revealed that business activity picked up after briefly flat-lining this summer. This is great news because services account for about two-thirds of US economic activity. Digging into the details, new business surged higher while costs fell a bit and hiring activity remained weak but steady.

Bottom line:
• Economy: Growth is moderating, but demand remains firm.
• Fed: Near-certain cut expected this month.
• Markets: Stocks climb on rate-cut optimism, bonds rally as yields fall.