From Resilience to Risk: The U.S. Jobs Market is Losing Steam

The U.S. labour market has been remarkably resilient over the last two years, but the latest data are showing clear signs of stress. Momentum is slowing, and the implications for markets and Federal Reserve policy are significant.

Here’s what stood out:

• Job openings fell below the number of unemployed for the first time since 2021, signalling softer labour demand.

• Private payrolls came in weaker than expected, underscoring a slowdown in hiring.

• Nonfarm payrolls added just 22,000 jobs, far short of the 75,000 expected.

• Unemployment rose to 4.3%, the highest level this year.

  
  

A softer employment backdrop raises the likelihood that the Federal Reserve will pivot toward rate cuts. Markets are now pricing in a 100% chance of a September cut, with even some speculation of an outsized 0.5% move. Bond markets have already responded: the 2-year Treasury yield has dropped to its lowest level this year, while the yield curve has steepened – a development that boosts conditions for banks and lenders.

The key risk now turns to inflation. 

This week’s CPI and PPI releases will determine whether the Fed has the flexibility to ease policy without reigniting price pressures. Headline inflation is expected to tick higher, while core measures are projected to stay sticky. If inflation stabilizes, the Fed will have more room to act.

For investors, this sets the stage for a few important dynamics:

• Volatility ahead: September and October are historically difficult months for markets, and some consolidation after above 25% rally in the S&P 500 since April would not be unusual.

• Policy support on the horizon: Rate cuts toward a more neutral level of 3.5% over the next 18 months should provide meaningful relief to households and corporations.

• Longer-term catalysts: Fiscal measures, corporate spending on R&D, and clarity on trade policy could underpin stronger growth into 2026.

  
  

Against this backdrop, we continue to see opportunities. U.S. large-cap equities remain well positioned, particularly in technology and AI, while mid-caps could benefit from a broadening market rally as conditions improve. We also favour a blend of growth and value sectors – consumer discretionary, financials, and healthcare – all of which may be supported by stronger demand as policy eases.

The labour market is sending a clear message: the cycle is shifting. For investors, the challenge and the opportunity lie in navigating the volatility ahead while positioning portfolios for a potentially more supportive policy environment in 2026.