(Bloomberg) — Strong evidence the US labor market is slowing rippled through Wall Street, driving stocks lower and bonds higher on concern the Federal Reserve will now have to rush to prevent further weakness.
The sharp cooling triggered fears about a more pronounced jobs slowdown, sparking a flight to Treasuries, with two-year yields hitting the lowest level since 2022. The data also prompted a fast repricing in money markets, which now project almost three Fed cuts this year.
Those prospects were not enough to sustain gains in the S&P 500. After hitting record highs, the gauge lost steam amid worries the Fed is behind the curve on preventing jobs weakening at a time when inflation continues to show signs of stickiness.
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To Bret Kenwell at eToro, investors should tread carefully. There’s a clear difference between a temporary cooling in the jobs market and a deeper downturn.
“Hoping for the former while ignoring the risks of the latter – just to usher in lower rates – is a slippery slope,” Kenwell said. “Stocks have held up well amid high rates and a resilient economy, but that resilience could quickly fade if the labor market shows real cracks.”
Job growth has moderated materially in recent months and openings have declined, weighing on broader economic activity. Nonfarm payrolls increased 22,000 in August, and revisions showed employment shrank in June for the first time since 2020. The jobless rate ticked up to 4.3%.
“Today’s news probably raises more questions about the growth outlook than about the Fed outlook,” said Michael Feroli at JPMorgan Chase & Co., adding the data should remove the “last major hurdle” for the Fed to cut rates by 25 basis points this month.
“We also think today’s numbers buttress the case for sequential, rather than staggered, rate cuts after September,” Feroli added.
“Bad news for employment is good news for investors wanting lower rates,” said David Russell at TradeStation. “A September cut is a near certainty and October is increasingly in play. The punch bowl could be ready to go as job growth grinds to a halt.”
While today’s report is not yet inviting renewed concerns around recession, worries about the health of the economy are starting to creep in, said Seema Shah at Principal Asset Management.
“A further deterioration in the health of the labor market would soon tip the balance to ‘bad news is simply bad news’,” she noted. “Equally a strong inflation print next week could strike new fears about a ‘stagflationary mix.’ The market is treading a very, very narrow path to continued gains.”
As the Fed prepares for its upcoming meeting, policymakers will likely focus on the weakness in the job market to defend their decision to cut rates, according to Jeff Roach at LPL Financial.
Economists at Bank of America Corp. now forecast two Fed cuts this year — in September and December — scrapping what had become an outlier call for no action until next year.
At Barclays Plc, economists said they now see three rate cuts in 2025 — one at each of the Fed’s remaining meetings — compared to the two reductions they previously expected.
To Tiffany Wilding at Pacific Investment Management Co., today’s data, along with other economic indicators, give the Fed room to begin cutting rates starting this month.
“We are not forecasting a recession and still expect a relatively gradual return to neutral as inflation normalizes,” she noted. “That said, the accumulating evidence of labor-market weakness warrants a somewhat faster pace of easing than we had previously projected.”
Even prior to the latest jobs report, a substantial slowdown in payroll growth over the summer had prompted comments from Fed Chair Jerome Powell and other policymakers that the balance of risks was shifting away from inflation and toward unemployment.
“Concerns about a weakening employment picture will dominate any lingering apprehensions around a de-anchoring of inflation expectations,” said Oscar Munoz and Gennadiy Goldberg at TD Securities, who expect three straight rate cuts starting this month.
“We remain buyers of rates on dips even as the move could prove a grind as markets are already penciling in a terminal rate below 3%,” they said.
To Krishna Guha at Evercore, the jobs data locks a 25 basis-point cut this month and will influence the way the Fed frames out the playbook post-September.
“The market has moved quickly to price an October cut as overwhelmingly likely following the report,” he said. “We do not think October is close to a lock, and believe it will be genuinely data-dependent.”
On Tuesday, the Bureau of Labor Statistics will release its preliminary benchmark revision, an adjustment that could shave hundreds of thousands from reported payrolls in the year through March.
Fed Governor Christopher Waller recently estimated that monthly job creation will be reduced by an average of about 60,000 a month.
Meantime, Fed Bank of Chicago President Austan Goolsbee said he’s still undecided on what course of action he will support at the September meeting, pointing to inflation data.
“I want to get more information. I’m still undecided as we’re going into this,” Goolsbee told Bloomberg Television. “We’ve got to look at the inflation side too.”
Investors could prove somewhat cautious ahead of Thursday’s consumer price index, which could pour some cold water on expectations of rapid cuts if services inflation remains firmer than expected, according to TD Securities strategists.
Ian Lyngen at BMO Capital Markets says he’s worried about the risk of a repeat of July’s composition – soft goods inflation with sticky services pressure.
“If there is a broadening out of service sector reflation, one would be remiss not to assume it would have a limited impact on the extent to which the Committee will be willing to signal future rate cuts,” he noted.
At Glenmede, Jason Pride notes that while Friday’s jobs report is the “cherry on top of the argument for a rate cut” in September, beyond that, the odds of a one-and-done cut are falling.
“If the data continue to follow recent trends, the Fed may be heading toward a path that sees them cut rates at each of its meetings through year-end,” he said.
Weaker jobs data will increase the odds of a Fed cut, but could create shorter-term volatility, as a cooling labor market is not a sign of strength, said Larry Tentarelli at Blue Chip Daily Trend Report.
Investor Dilemma
There is clearly a dilemma in investors’ minds right now, which is why stocks initially rallied and then dropped, according to Fawad Razaqzada at City Index and Forex.com.
A weakening jobs market indicates the economy is cooling, which could ultimately be “bad news” for company profits, he said. But this is countered by argument that lower rates should soften the blow and provide a positive backdrop for stocks.
“All told, today’s weaker jobs report should not significantly reduce the appetite for risk taking,” Razaqzada noted. “Ultimately, the trend is bullish for markets and dip-buyers will use any excuse to buy any dips they can get their hands on.”
In fact, equities closed off session lows on Friday, and most shares in the S&P 500 actually gained.
Mark Hackett at Nationwide anticipates near-term volatility amid softer payroll data, seasonal factors, lofty expectations, and signs of fatigue within large-cap technology.
“That said, we see several important tailwinds building momentum,” Hackett notes. “These include fiscal support from the recent budget deal, a near-term ‘sugar rush’ from trade-related purchase agreements, a weaker dollar, improving earnings expectations, and a more dovish Federal Reserve.”
Over the next six to 12 months, Hackett says these supports should cascade through the market and could be amplified by retail investors who remain confident in buying dips.
“While valuations are often cited as a concern, history shows they are a poor market-timing tool,” Hackett said. “Outside of high-profile technology names, valuations are broadly reasonable — particularly if earnings continue to trend higher.”
Corporate Highlights:
President Donald Trump said he would be imposing tariffs on semiconductor imports “very shortly,” but spare goods from companies that have pledged to boost their US investments. Nvidia Corp. slipped amid news Broadcom Inc. is helping OpenAI design and produce an artificial-intelligence accelerator from 2026. Trump threatened a probe that could prompt fresh tariffs in response to the European Union fining Alphabet Inc.’s Google over findings the company abused its dominance by giving its own ad exchanges a competitive advantage. Tesla Inc. proposed a new compensation agreement for Chief Executive Officer Elon Musk potentially worth around $1 trillion, a massive package without precedent in corporate America. Apple Inc.’s annual sales in India hit a record of nearly $9 billion in the last fiscal year, signaling growing consumer demand for its flagship devices as the company ramps up its retail footprint in the world’s most populous country. Apple’s biggest product launch event of the year takes place on Tuesday, Sept. 9, when the company will introduce its next-generation iPhone lineup, new smartwatches and other peripherals. Lululemon Athletica Inc. slashed its outlook, disappointing investors for a third straight quarter as it struggles to meet high expectations and balance tariff expenses in a difficult consumer environment. Eli Lilly & Co. and Novo Nordisk A/S fell after US regulators established a “green list” of foreign manufacturers who produce raw materials that compounding pharmacies use to make copies of their blockbuster GLP-1 drugs. Roblox Corp. is testing a short-form video app similar to TikTok that will allow users to capture and share 30-second clips of their video-game play. BMW AG unveiled the first of a new range of electric vehicles meant to help the German carmaker push back against Chinese rivals and take back the lead in automotive engineering. BBVA SA is finally submitting its takeover bid for Banco Sabadell SA to the target’s shareholders, ushering in the final leg of a deal that could create a huge new Spanish bank. Orsted A/S shareholders voted to support a crucial 60 billion Danish kroner ($9.4 billion) rights offering, just after the company issued a fresh profit warning on Friday. Nvidia’s major server production partner Hon Hai Precision Industry Co. reported solid monthly sales growth, signaling demand for AI infrastructure remains intact in the US. Some of the main moves in markets:
Stocks
The S&P 500 fell 0.3% as of 4 p.m. New York time The Nasdaq 100 was little changed The Dow Jones Industrial Average fell 0.5% The MSCI World Index was little changed Bloomberg Magnificent 7 Total Return Index fell 0.3% The Russell 2000 Index rose 0.5% Currencies
The Bloomberg Dollar Spot Index fell 0.4% The euro rose 0.6% to $1.1718 The British pound rose 0.5% to $1.3504 The Japanese yen rose 0.7% to 147.45 per dollar Cryptocurrencies
Bitcoin rose 1.1% to $111,570.39 Ether rose 0.6% to $4,330.83 Bonds
The yield on 10-year Treasuries declined seven basis points to 4.09% Germany’s 10-year yield declined six basis points to 2.66% Britain’s 10-year yield declined seven basis points to 4.65% The yield on 2-year Treasuries declined six basis points to 3.52% The yield on 30-year Treasuries declined nine basis points to 4.77% Commodities
West Texas Intermediate crude fell 2.3% to $62.05 a barrel Spot gold rose 1.4% to $3,593.89 an ounce ©2025 Bloomberg L.P.