Largest ever downward jobs revision
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The Bureau of Labor Statistics announced a massive revision to its jobs data this week, showing that the U.S. economy added 911,000 fewer jobs between April 2024 and March 2025 than previously reported. This is the largest downward revision on record and effectively cuts job growth in half for the period. The revision highlights that the labor market may have been significantly weaker than originally believed. For policymakers, it raises questions about how resilient the economy really is and adds pressure on the Federal Reserve as it weighs future rate cuts. Investors are now reassessing growth assumptions given this softer jobs backdrop.

• The revision means the economy created an average of only 70,500 jobs a month, not the 146,500 previously thought
• This is below the roughly 100,000 a month rate of job creation needed to keep up with the growth of the labor force
• Along with the weak jobs numbers last week, this strengthens the case for a larger rate cut during the Fed meeting next week
• On the back of this announcement, the 2-year US treasury yield traded to levels not seen since before the Fed hiking cycle began in 2022
• The 10-year yield, which is more important because it is the basis for both consumer and corporate lending rates, traded below 4% briefly before rebounding to end the week

Inflation signals potential for stagflation

Inflation ticked up in August, with headline CPI rising 2.9% year-over-year and core CPI (excluding food and energy) holding at 3.1%. On a monthly basis, CPI rose 0.4%, a faster pace than July’s 0.2% gain. The increase was driven by shelter costs, food, and energy. While inflation has eased considerably from its 2022 peak, the latest data show that price pressures remain sticky. This complicates the Fed’s task: the jobs data argue for easing policy, but the inflation numbers suggest caution in cutting rates too aggressively.

• As the labor market is clearly signaling a slowing economy, and inflation is accelerating, we may be entering a stagflationary environment
• The last time the US experienced stagflation, when inflation hit 13% and unemployment peaked at 11%
• This was the cause of widespread hardship, particularly for the lower-income segment of the population
• While the current environment is nowhere near as dire, if consumers begin to cut back on spending it could kick off a self-fulfilling cycle
• We think the Fed next week will err on the side of addressing the weak labor market over the elevated inflation, so cuts are likely
• If the economy were to show more deceleration in the near future, the likely response is for the Fed to ease even more aggressively
• This is most likely why risk assets like stocks and crypto continue to trade through or near all-time highs

Mortgage rates decline

Mortgage rates have started to ease, offering some relief to homebuyers. The average 30-year fixed mortgage rate fell to around 6.3%, its lowest level in nearly a year. The 15-year fixed rate has also dipped, hovering near 5.5%. While these moves are modest, they represent the largest week-over-week decline in a year. Still, affordability remains stretched compared to the pre-2022 era, and whether lower rates will materially boost housing demand depends on how sustained the decline proves to be. For now, the combination of weaker job growth and slightly lower borrowing costs could support the housing market at the margin.

• For almost 3 years, the housing market has been burdened by high mortgage rates
• Lower mortgage rates will likely spur new buying demand
• We still have the issue of elevated prices, however, so sellers will likely need to cut prices for the market to start to normalize
• As the Fed lowers interest rates, mortgage rates should come down further, hopefully closing the affordability gap a bit more

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