THE UNEMPLOYMENT REPORT
Last Friday, we got the so called jobs report. This is one of the most important macro reports of the month, because it’s one of the main tools the Fed uses to decide what to do with interest rates.
At first glance, the numbers looked very strong.
The economy added 178,000 new jobs, well above expectations, which were around 50,000 to 60,000.
At the same time, unemployment fell to 4.3%.
So if I look at it superficially, I might say… great.
And to be fair, several sectors drove this growth. Healthcare took the lead, with construction and transportation following.
So far, so good. BUT unemployment fell not because more people found jobs.
It fell because nearly 400,000 people left the labor force. In other words, they stopped looking for work.
So unemployment is going down… but for the wrong reason. And that’s one of the most important things I take away from this.
I also see it in the participation rate, which dropped to 61.9%, the lowest level since 2021.
On the other hand, wages grew less than expected, just 3.5% year over year. Working hours declined, and long term unemployment remains elevated.
When I put all of this together, it tells me something very specific. The labor market isn’t collapsing, but it’s definitely not strong either. It’s somewhere in the middle.
And this is probably the most dangerous phase. Because it’s not weak enough for the Fed to act… but not strong enough to reassure me.
WHAT’S HAPPENING WITH INFLATION
Now let me move to the second part, which is even more important: inflation.
The Fed has made one thing very clear. Inflation may have come down from its 2022 highs… but it’s not over.
And the most concerning part? It’s no longer a localized problem. It’s everywhere.
At its peak, nearly 80% of goods were seeing inflation above 3%, and even today, that number remains elevated across major economies.
Now, I could argue that inflation was driven by supply chains, energy, or temporary shocks. But that’s not necessarily the case anymore, because now inflation is also being driven by wages and services.
When wages are rising above 3% across so many sectors, that means costs are being embedded into the economy. And services, which make up the largest part of the economy, are keeping these pressures alive.
INVESTMENT TAKEAWAY
So what do I have here?
A labor market that isn’t weak enough to force the Fed to act, and inflation that remains persistent.
So… what’s the reason to cut rates?
None.
And the market already knows it.
According to the FedWatch Tool, the probability of an immediate rate cut is almost zero.
Even by December, we’re talking about probabilities below 20%.
So it looks like rates will stay higher for longer than most people expected.
And that means more pressure on the economy, more uncertainty in the markets, and less “easy” growth.