This week, a wave of economic data pointed to a labor market that’s losing steam, reigniting debates about whether the Federal Reserve has overly prioritized inflation at the expense of its full employment mandate. Initial jobless claims rose to 237,000, while private-sector hiring slowed significantly, with just 54k new jobs added in August, according to ADP. The JOLTS report showed job openings fell to a 10-month low, and for the first time since 2021, there were fewer than one job opening per unemployed worker. Meanwhile, Challenger data revealed a sharp uptick in job cuts, and nonfarm payrolls came in at a weak +22k for August. Together, these figures suggest not only a cooling job market, but also a longer search process for unemployed workers, adding weight to expectations of a Fed rate cut in the near term. A September cut is now priced in as a certainty, and odds of it being 50-basis points are increasing.
In addition to labor market weakness, broader economic signals also remained mixed. The ISM Manufacturing Index showed contraction for a sixth straight month, and while the ISM Services Index posted modest growth, its employment component remained in contraction. Construction spending data revealed a surprising dip in nonresidential activity, reflecting a slowdown in business investment. Although bond markets rallied on the back of weak labor and manufacturing data, driven by speculation about upcoming Fed rate cuts, yields remained stubbornly elevated at the long end of the curve. This suggests that investors remain wary about sticky inflation, still evident in core PCE (2.9 percent) and CPI (3.1 percent) readings, as well as consumer expectations for future inflation, and are hesitant to lock into longer-term debt.
In the political arena, tensions continue between the Trump administration and the Federal Reserve, with the administration pursuing a criminal investigation into Fed Governor Lisa Cook, citing unsubstantiated mortgage fraud allegations. Cook, who has not been charged, claims the effort is politically motivated and part of a broader campaign by Trump to replace independent Fed officials with loyalists who will lower interest rates. Her legal team is fighting the attempt to remove her, and the case is expected to reach the Supreme Court, which has previously affirmed the Fed’s structural independence. Simultaneously, Trump’s Fed nominee, Stephen Miran, faced sharp criticism during his confirmation hearing, with opponents questioning whether he would prioritize political loyalty over economic data.
Tariffs also resurfaced as a major theme. Nearly all Federal Reserve districts noted price pressures from tariffs in the August Beige Book, especially on input costs, which continue to impact business sentiment. A court ruling this week invalidated most of Trump’s tariffs from September 2024 onward, though the case will likely also head to the Supreme Court. Retailers and hospitality businesses have been offering discounts to offset weakening demand, and consumers continue to struggle with wage growth that fails to keep pace with inflation, leading to flat or declining spending patterns across most regions. These dynamics reflect an economy that’s simultaneously grappling with slowing growth, persistent inflation, and policy uncertainty.
In mortgage-specific developments, MBA data showed a 1.2 percent weekly decline in mortgage applications, a signal that higher rates and affordability concerns continue to dampen borrower activity. Meanwhile, MBS spreads have narrowed modestly but remain elevated, hovering around 235 basis points, still 50 to 60 basis points above historical norms. If spreads revert to historical levels, mortgage rates could ease even without movement in benchmark yields, offering some hope for rate-sensitive segments like housing and refinance activity. For now, though, the industry remains caught between rate volatility, macro uncertainty, and policy-related crosswinds. Fun times.