Weekly market commentary

Slower hiring
Monthly change in U.S. payrolls and breakeven estimate, 2023-2025

The Fed has cut rates twice already this year and put a weakening labor market at the center of its decisions. The central bank worries that the labor market could weaken further, so “risk management” rate cuts were needed. The Fed has a harder time understanding the state of the economy given the data delays tied to the long government shutdown heading into next week’s meeting. The September jobs report and other data show the labor market in a “no hiring, no firing” stasis. Job gains have slowed since the start of the year. See the chart. Both labor demand and supply has slowed, the latter due to a sharp slowing of migration. That has pulled down the “breakeven” level of payrolls gains that keep the unemployment rate steady. It could also explain why wage growth has also proved steady, and the unemployment rate has only risen slightly this year – and is still historically low.

The delayed data – including both the October and November payrolls data on Dec. 16, but no October unemployment data – is likely to be noisy. The October data will include deferred federal government layoffs that will likely cause a sharp drop in overall employment that month – something the Fed would have already taken into account in earlier decisions. And this data will be released after its Dec. 10 policy decision. Markets are mostly pricing in a quarter-point cut next week. We agree and see a “no hiring, no firing” stasis giving the Fed room to keep trimming policy rates in 2026. That’s different from earlier this year when the Fed was facing calls to cut rates even with the labor data appearing strong, raising policy tensions between sticky inflation and debt sustainability. The Fed now has a path to cut rates without raising questions around these policy tensions, even as inflation holds well above its 2% target. If inflation were to accelerate next year due to stronger activity or renewed hiring, those tensions could re-emerge and drive long-term bond yields higher.

Slower hiring

Part of this tension stems from persistently large U.S. budget deficits. The opposite is happening in the UK: the government is trying to reduce its deficit and even achieve a surplus on a five-year horizon in the latest budget. The UK Chancellor delivered a positive surprise with various revenue raises boosting its so-called “fiscal headroom” – the buffer between government revenues and spending – by more than expected. This shows how the UK needed to strike a balance on market and political credibility and has done so for now, even if the tax revenue as a share of GDP is set to hit a record 38% in 2030.

We stay neutral on UK gilts as the new budget front-loaded spending and back-loaded much of the tax gains. Yet we have a relative preference for gilts on a strategic horizon of five years or longer, thanks in part to a lower neutral rate – one that neither stimulates nor hurts growth – than other developed market (DM) government bond markets. We had upgraded long-term U.S. Treasuries to neutral as the Fed resumed rate cuts but need to be nimble given the simmering policy tensions – and expect those tensions to persist. Our updated tactical views in our 2026 Global Outlook are due out tomorrow, Dec. 2.

Our bottom line

We think a Fed rate cut this month is in play as data keep showing the labor market cooling. That backdrop and the AI theme support our pro-risk stance. We stay neutral UK gilts but prefer them on longer horizons over other DM bonds.

Market backdrop

U.S. stocks bounced back during the holiday-shortened week, with the S&P 500 gaining almost 4% as the AI theme returned. The Nasdaq gained about 5%. That helped erase most losses for the month, apart from the Nasdaq, during which AI stocks, shares popular with retail traders and bitcoin came under pressure. Bitcoin recovered over the week but was still down about 17% on the month. U.S. 10-year Treasury yields fell back near 4.00% as Fed cuts were priced back in.

The U.S. ISM index will give a read on the health of the struggling manufacturing sector. U.S. jobless claims remain a key focus on the labor market as markets await the resumption of the U.S. payrolls data in mid-December. The University of Michigan consumer sentiment survey – which has showed much weaker sentiment relative to other surveys – may get more focus given the softer retail sales data, though for September, seen last week.

Read our past weekly commentaries here.