The Breakdown - Soft Jobs Report Clears the Way for Fed Cuts

Episode Date: September 10, 2025

August’s jobs report showed just 22,000 payrolls added, unemployment rising to 4.3%, and manufacturing losses continuing—making it the weakest labor market since 2016. With downward revisions and a looming payroll adjustment cutting nearly a million jobs from earlier counts, markets now see a Fed rate cut next week as all but certain. In today’s Breakdown, NLW explores what the numbers mean, the administration’s clash with the BLS, and whether cuts will be good or bad for risk assets. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, September 9th, and today we are talking soft job numbers and the implications for rate cuts. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, right now, everyone has their attention firmly turned towards the Fed in September, and frankly, last Friday's job numbers absolutely helped clear the way for Fed cuts next week. The jobs numbers came in extremely soft. Just 22,000 non-farm payrolls were added in August,

and the unemployment rate ticked up again to 4.3%. Youth unemployment, meanwhile, rose to 10.5%, meaning this is the worst job market for college grads and school leavers since 2016. The health care sector was one of the few industries to add jobs, while information, financial services, federal government, and business services are all an outright contraction. The politically sensitive manufacturing sector posted another month of job losses, with 12,000 positions lost to bring total losses for the year to 78,000. The jobs report sent a clear message that the labor market is falling apart. Morgan Stanley analysts called it a, quote, no higher labor market. Further revisions were made to the jobs numbers for June and July,

with 6,000 jobs added to the July numbers and June revised down to show a net loss of 13,000 jobs. To give a sense of scope over the past year or two, 300,000 jobs added has been at the high end of the range, while 43,000 jobs added in October of 2024 was the worst month over the past three years. Three of the past four months are worse than that October, and we now have the first outright negative months since 2020. Daniel Zhao, chief economist at Job Site Glassdoor, said, the job market is stalling short of the runway.

The labor market is losing lift, and August's report, along with downward revisions, suggests we're heading into turbulence without the soft landing achieved. Olu Sanala, head of U.S. economic research at Fitch Ratings commented, the warning bell that rang in the labor market a month ago just got louder. A weaker-than-expected jobs report, all but seals a 25-bases point rate cut later this month. Four straight months of manufacturing job losses stand out. It's hard to argue that tariff uncertainty isn't a key driver of this weakness.

For the administration, reactions were a little all over the place. After last month's report, President Trump fired the head of the Bureau of Labor Statistics and essentially accused her of cooking the books. many noted that Trump seems to want two things at once. Glowing labor market statistics that show he is presiding over a booming economy, but also weak enough statistics to allow the Fed to start cutting. An administration figure is now installed at the BLS, and evidently it takes more than a month to fiddle with the numbers.

Either that or there's no amount of interference that can make this labor market seem okay. Commerce Secretary Howard Lutnik was Lyman-Bloomberg as the numbers were supposed to be released on Friday, however a technical issue caused a significant delay. Lutnik quipped that this made it, crystal clear we should have fired the person running that group. After the numbers fell flat, Lutnik commented that the jobs numbers, quote, will get better because you'll take out the people who are just trying to create noise against the president. This is going to be the greatest growth economy six months from now a year from today. Labor Secretary Lori Chavez de Remmer blamed

the Fed, stating it was, quote, failing American workers by dragging its feet and refusing to lower rates. White House Economic Advisor Kevin Hassett touted the billions of dollars of pledged investment, claiming it means the, quote, jobs will surely come. On Monday, the Wall Street Journal reported that the administration was preparing a report laying out the shortcomings of the BLS. The study written by the Council of Economic Advisors is expected to be published in the coming weeks. Erica Groshen, an Obama-era BLS commissioner, said, I fear this is sort of going to be used as a weaponization. I worry that the administration wants to clear the decks in advance of putting in a new

commissioner so the new commissioner can bring in people from the outside who may not be qualified. A White House spokesperson, however, denied this charge, stating, there is nothing newsworthy about monitoring and documenting the quality of government economic statistics and baseless conjecture that the administration is conspiring to oust BLS leadership should be treated as another unsurious conspiracy theory. She added that the, quote, fake news reporters are printing, quote, illogical nonsense. As tumultuous a few months as the BLS is facing, realistically there's a limit to how much any one administration can do. The economic data provided by the BLS is absolutely critical for guiding Fed decisions and indeed decisions made

across the economy. But the accuracy of that data is primarily important when there's confusion about where the economy is headed. The data over the past quarter, meanwhile, is completely unambiguous and paves the way for the Fed to start cutting. Now, one more note on this front that came in as I was recording this. On Tuesday, we got a payroll division, and the number of workers on payrolls will likely be revised down by a record 911,000 or 0.6%. Before this revision, the government's payroll data indicated that employers added about 1.8 million total jobs this year through March on a non-seasonally adjusted basis. The revision puts average monthly job growth at about half of that. Now, all of this is adding fuel to the fire that a rate cut is at this point, basically assured. And indeed, with labor

market weakness undeniable, markets are fully pricing in a cut when the Fed meets next Wednesday. We still do have CPI inflation data to be released on Thursday, but Chris Larkin of E-Trade said that it would take a, quote, major upside surprise to derail a Fed rate cut next week. In fact, the market is so convinced the Fed will cut rates that some traders are hedging against the double cut. While the odds of no cut have dropped to zero, the market is now implying an 8% chance of a double cut. Looking to the end of the year, the market is now pricing in three cuts, one at each of the remaining meetings. Perhaps most notably, the long-duration bond market appears to be validating that a cut is the right move. You'll recall that during last year's mini-cutting cycle, 10 and 30-year bond

rates started spiking towards the end of the year. Whether this was bond vigilantes or just market forces, the effect was the same. The Fed was forced to cut it short and hold rate steady for all of 2025. This time, it looks like the bond market is giving its blessings. 10-year rates are getting close to 4% for the first time since April, and the 30-year has dipped below 4.75% its lowest level since May. 30-year mortgage rates have hit an 11-month low of 6.3% and saw their largest one-day drop in over a year on Friday. Now, these are still extremely elevated compared to anything from the 20 years prior to the pandemic, but many market participants are just happy that things seem to be moving in the right direction. Trump has been explicit that

he wants the Fed to cut in order to bring mortgage rates down. Had they spiked as they did during last year's Fed cuts, we would be looking at a completely different macroeconomic picture. While the reduction in long bonds is a good sign that the Fed has room to cut, Bloomberg opinion columnist John Authors warned that markets still look a little uncertain. He noted that the 30-year yield is still trapped in a very tight bound above the 200-day moving average, meaning in other words, that this isn't a breakdown and could end up just being a tiny bit of breathing room. Now, heading into next week's Fed meeting, one of the big topics will be, of course,

Central Bank independence. Given the president's attempt to fire a sitting Fed governor last month, there's naturally going to be commentary that Trump bullied his way into a cut. Now, that will not be the case. These terrible job numbers more than demand a cut, but the narrative will still loom large. Over the weekend, Treasury Secretary Scott Besson attempted to get ahead of the conversation in an op-ed in the Wall Street Journal. He called the extraordinary policy tools used since 2008, gain-of-function monetary policy, and argued that, quote, the central bank put its own independence at risk by straying away from its narrow statutory

mandate. He wrote, overuse of non-standard policies, mission creep, and institutional bloat, threaten the central bank's independence. The Fed must change course. Its standard toolkit has become too complex to manage with uncertain theoretical underpinnings. Simple and measurable tools aimed at a narrow mandate are the clearest way to deliver better outcomes and safeguard central bank independence over time. Now importantly, Besson's primary critique was not that the new tools were inappropriate, but that they had failed. He wrote, repeated misses demonstrate that the Fed placed too much faith in its own abilities and an expansionary fiscal policy to spur growth. When the Trump administration shifted towards tax cuts and deregulation, the Fed's forecasts were too pessimistic, underscoring its

reliance on flawed models and neglect of supply side effects. Besson further criticized the Fed's expanded footprint under Dodd-Frank, making it the dominant banking regulator as well as the lender of last resort. Overall, Bessent called for a, quote, honest, independent, nonpartisan review of our entire institution, including monetary policy, regulation, communication, staffing, and research. Besson ultimately argued that central bank independence comes from public trust, and a fulsome review is necessary to reestablish the Fed's credibility. And while the op-ed was common measured, there are certainly signs of cracks under the surface. On Monday, Politico reported that Besson got in a public dust-up with FHA Director Bill Pulte

Pulte last Wednesday. Around 30 members of the administration and major Trump donors had gathered for Chmoth Palahapatia's birthday at an exclusive Georgetown club. Besson reportedly confronted Pulte, asking him why he was talking to the president behind his back and said, I'm going to punch you in your effing face. Trump insiders variously called the incident bonkers and unhinged. Now, beyond the simple point that the administration has a few fractures, the dispute could suggest that Besson isn't fully on board with the assault on the Fed. It was Pulte who made

allegations against Fed Governor Lisa Cook that led to her firing, and so maybe that's part of all of this, or maybe this is just another crazy sideshow. With rate cuts essentially locked in for next week, markets naturally shifted the question of whether this is the good kind of rate cuts or the bad kind of rate cuts. Investco said in a note on Friday, while the reports showed job growth had slowed, it doesn't appear to be signaling a recession. Slower growth, anchored inflation expectations, falling yields, and anticipated rate cuts point to an optimistic outlook for stock. Now, that might be the case, but there is a very narrow window where rate cuts are good for stocks. If this is a small rate adjustment to bring Fed funds in line with inflation, similar to the

cutting cycle in the mid-90s, then that might be the case. But if the economy is heading over the cliff into a recession, then there's very little reason to think rate cuts will be good for stocks ultimately. Still, while the labor market data is far from rosy, it's by no means a recessionary print. We are yet to see big spikes and layoffs that characterize previous recessions. Firms have just stopped hiring. Unemployment is up, but again, there's no alarming spike in the data. Angel Ubede, an economist at Citadel said, The economy is on the good side of a fragile equilibrium, especially with the labor market, but we are close to the edge.

We have an economy that is more or less resilient, with unemployment still low, consumer health hasn't cracked yet, and monetary policy leaning towards easing, which he called a happy combination. Still, you don't have to go far to find warning signs. Consumer signals like credit card delinquencies and bankruptcies are seeing fresh decade-long highs. commercial real estate now has a 12% delinquency rate, higher than the financial crisis peak. QE Infinity wrote, So we're near GFC on 90-day delinquencies on almost everything. The credit card and student debt are the most concerning. The mortgage numbers are fake due to loan modifications. It's fraud, basically.

If the mortgage delinquencies were real, they'd be near GFC highs. Lumber prices are down 25% since hitting a three-year high at the beginning of August. Traditionally, lumber as a major input for housing, is a huge leading indicator for a recession. This time around, lumber prices have been all over the map due to tariffs, but they're still signal in the noise. Last week, North America's third largest lumber producer said it was cutting output by 12%. Analysts expect further closures and curtailments to come. Pre-tariff stockpiling is having an impact, but the major problem is a lack of demand. The copper-to-gold ratio, another classic recession barometer, has now dipped below the 2020 bottom and reached levels not seen since

1987. A big confounding factor is, of course, the AI investment boom. Over half a trillion dollars is being spent on AI chips in data center construction this year. Economists estimate that between 15 and 40% of the 2% growth in GDP this year has come from the AI buildup. While it would be too simplistic to exclude this spending when thinking about where we are in the business cycle, it's still a valid question. What would the economy look like without half a trillion dollars in AI CAPEX? Ultimately, the Fed is all but certain to start cutting rates next week, and it seems like they'll keep going for some time. There's currently a very broad consensus that rate cuts will be good for risk assets. Whether that's true or not, we will just have to wait and see. For now,

that's going to do it for today's breakdown. Appreciate you listening, as always. And until next time, be safe and take care of each other. Peace.