Market preview for the coming session
The U.S. labor report released today forces a rethinking of prospects for interest rates and market positioning heading into the fall. Payrolls rose by only 22,000 in August and revisions showed employers actually cut payrolls in June by 13,000, ending a 53 month string of monthly job gains. The three month average for job additions has plunged to roughly 29,000 compared with a three month pace of about 111,000 as recently as March. That sudden loss of momentum has already altered how traders price policy and risk for the remainder of the year.
For the coming trading session, expect activity to center on interest rate sensitive instruments and sectors. The weaker employment data makes it more likely the Federal Reserve will lower its policy rate at the September 16 and 17 meeting. The market reaction to the report was immediate, with the probability of multiple cuts by year end climbing sharply. The CME FedWatch odds of three cuts rose from near 40 percent to roughly 80 percent in the hours after the release. That change in expectations is likely to put downward pressure on Treasury yields and lift rate sensitive asset classes once trading begins.
Market participants should prepare for greater demand for duration, meaning U.S. government bonds may attract flows as hedges against slower economic growth. A dovish tilt in policy expectations will tend to drive benchmark yields lower. That dynamic usually supports equities that benefit from cheaper financing and higher present valuations for longer duration cash flows. Residential real estate related names and long duration technology stocks are examples of groups that often respond favorably to easier policy. Conversely, traditional lenders may face renewed pressure as expectations for a lower policy rate reduce net interest margins for banks.
Currency markets are also likely to respond to the shift in Fed pricing. A more aggressive rate easing path tends to weaken the U.S. dollar relative to major peers. That would provide relief for companies facing higher import costs tied to tariff related price pressures, although tariff policy itself remains a constraint on global trade and business planning. One Fed governor emphasized that tariffs behave like taxes and will slow growth, and that view feeds directly into market calculations about how many rate cuts will be needed to stabilise the economy.
Sectors directly tied to the labor data warrant special attention. Health care was one of the few sectors showing payroll gains in August, so health care payroll strength may shine a favorable light on service providers and staffing related names within the sector. Manufacturing on the other hand lost 12,000 jobs in August and is down about 78,000 year over year. That weakness will weigh on industrials and some materials companies, particularly those exposed to higher costs for imported inputs and uncertain trade policy outcomes.
The public payroll is a distinct theme to watch. Federal employment declined by 15,000 in August and is down roughly 97,000 since January. The official survey may not fully capture workers on paid leave or on severance, as the Bureau of Labor Statistics notes, but even so the numbers point to contractions in parts of the public workforce that could influence spending and hiring trends in affected localities and contractors. Market participants should price in slower government payroll growth as a structural drag on aggregate U.S. hiring for the near term.
There is also debate about the quality of the data and the potential for future revisions. Critics in Washington suggested that response rates at the Bureau of Labor Statistics have been weak and that the August print might be revised upward later. Those arguments carry enough weight to keep some investors cautious, but revisions cannot be counted on to remove the immediate economic implications. For now policy makers appear to be taking the weaker readings at face value. The Fed has signaled it is watching the unemployment rate more closely, and the unemployment rate did tick up by 0.1 percentage point to 4.3 percent, the highest reading since 2021.
From a trading standpoint the calendar is crowded and important. The Consumer Price Index for August is scheduled for release next Thursday and will be the next major data point for policy expectations. Traders will watch that report for confirmation that price pressures are not remaining persistently elevated. Between now and the mid September Federal Open Market Committee meeting, expect headlines about incoming economic indicators to carry outsized influence, and be ready for heightened volatility as markets adjust to new rate cut probabilities.
Positioning ideas for the session would reflect the twin themes of easier policy ahead and a softening labor market. Investors seeking defensive exposure may favor high quality sovereign bonds and selected long duration equities that benefit from lower discount rates. Those looking for yield could consider sectors that historically outperform when yields fall. Active managers should weigh the risk that data revisions or an unexpected CPI outcome could quickly reverse sentiment, and that political commentary about central bank timing will add noise to price discovery.
Summing up, the jobs report represents a clear turning point for market expectations. Traders should expect lower Treasury yields, a softer dollar and a potential reallocation toward rate sensitive equities at the open. Watch the CPI release next week and the run up to the Fed meeting for confirmation. With the probability of multiple rate cuts this year now priced in at much higher levels, markets will be testing whether weaker labor conditions persist and how quickly policy makers will respond.
