The Macro Backdrop

Job Growth Not What We Thought

There is little question that the key economic storyline of Q3 was the fact that new job creation was not anywhere near as solid as the markets and, perhaps more importantly, the Fed believed. Indeed, while the headline number for monthly nonfarm payrolls has revealed definitive cooling, it was the rather sizeable downward revision to the May and June tallies that really stood out. In fact, as of this writing, the June payroll number actually contracted, the first monthly negative showing since 2020.

That being said, it is interesting to note that the unemployment rate still stands in the historically low 4%’s, and weekly jobless claims remain in non-recessionary territory. These developments have given rise to the saying that the U.S. labor market setting is in a “no-hire, no-fire zone.”

In terms of the underlying economy, the consumer has remained stalwart, continuing to provide solid contributions, as underscored by the recently better-than-expected monthly Retail Sales report. As a result, economist projections for Q3 real GDP are coming in anywhere from +2.0% to +3.0%, after the second quarter rebound in growth of +3.8%.

While the impact of tariffs and a cooling in new job creation need to be watched closely, it has become more apparent that the U.S. economy may be able to avoid investors’ post-Liberation Day worst fears, i.e., an outright recession.

Inflation: Searching for Tariff-Induced Inflation

The “other shoe” the markets have been waiting to see drop is whether tariff-induced inflation will rear its ugly head. Thus far, there has been no surge in price pressures, but there have been signs that the spring bout of disinflation may now be over.

After coming in as low as +2.8% as recently as May, core CPI has since rebounded to +3.1%, while the Fed’s preferred core PCE gauge has also risen 0.3 pp to +2.9%. Although neither of these inflation readings should necessarily be deemed as worrisome, they are moving further away from the Fed’s +2% target.

Where should investors look to see if tariffs are playing a role in future price pressures? The goods component. Service-related inflation has managed to stay relatively calm, which is good news. However, according to recent CPI data from the goods side of the ledger, prior unchanged or negative monthly readings earlier in the year are now on the plus side, albeit remaining somewhat modest. Going forward, any tariff-related price increases would be more likely to show up in the goods sector of the economy, while services could be more neutral on overall inflation trends.

The potential challenge going forward will be to see if the markets can look through any tariff-induced increases to inflation and focus instead on underlying demand pressures. In addition, as Fed Chair Powell recently stated, another key factor to consider is whether any potential increase in prices will be short-lived or have more of a persistent impact.

Either way, the Fed’s 2% target continues to be elusive.

Fed Policy: Rate Cuts Resume

As was widely expected, the Federal Open Market Committee (FOMC) implemented a 25-basis-point (bp) rate cut at the September FOMC meeting, bringing the new Fed Funds trading range down to 4%–4.25%. With the resumption of rate cuts now officially “in the books,” the more pertinent question is: what will the Fed have in store for the markets for the remainder of this year and 2026? Remember, it was exactly a year ago that Powell & Co. embarked on this rate-cut cycle and followed their first rate cut in September 2024 with two more easing moves to finish off the year. Will history repeat itself here in 2025? That’s what inquiring minds want to know.

There’s no doubt the tilt will be for further rate cuts, as the voting members have consistently stated that, prior to this latest easing move, monetary policy had been modestly/mildly restrictive. Based upon economic data at this point, there doesn’t seem to be a need to go into an “accommodative phase” for policy just yet, but perhaps just get back to “neutral,” a point Chairman Powell emphasized at the FOMC presser.

The key question going forward is: what is a “neutral” rate? If you believe it lies in the area of 3.50%, then investors could expect to see two additional quarter-point rate cuts forthcoming. Two more rate cuts could come at each of the remaining FOMC meetings this year, or perhaps Powell & Co. may want to take a more deliberate approach and utilize an “every other” meeting approach to wait out the labor market/inflation data.

Bottom line: With Fed policy remaining highly data-dependent at this stage of the game, getting policy to neutral is a good starting point. If the upcoming employment data doesn’t improve or gets worse in the months ahead, the voting members will more than likely front-load their rate cuts and get them in before year-end…then on to 2026.

Searching for GeoAlpha

The flurry of tariff headlines has slowly—but steadily—receded. While there are still lingering uncertainties around particular levies, they are predominantly niche and far less substantive than the ones announced on the infamous “Liberation Day.” For markets, this places the peak of tariff uncertainty squarely in the rearview mirror. They are still there. But they are largely known and being mitigated by U.S. businesses. The current Federal government shutdown is largely noise for investors. It does not affect the ability of the government to pay its debts and is likely to be resolved before too much damage is done to the U.S. economic outlook.

From a geopolitical perspective, there has been little change in the outlook. The war in Ukraine continues with the Trump administration moving to put additional pressure on the primary revenue source of the Russian Federation—oil. Under traditional circumstances, this would be highly positive for oil. That has not been the case, as the market remains well-supplied, and OPEC+ (which awkwardly includes Russia) is pledging to raise output in the coming months. On the domestic front, the U.S. government has increasingly made strategic investments in industries deemed necessary from a national security perspective. This—like tariff policy—will continue to be a hallmark of the administration’s push for onshoring production, and more announcements are likely in the coming months.

There are certainly going to be further headlines related to policy going forward. The Supreme Court is going to hear arguments on whether or not the current tariffs are illegal in early November, and that could cause some noise around the outlooks for various policies. But it will be just that—noise. Tariffs are already in the system, and companies have adapted.

When it comes to the outlook, it is important to do just that—look out. Tariffs are behind, not in front, and that should not be ignored.