Market Monitor | Mid-Month Update
Headlines and Highlights
- Fed poised to cut after nine-month pause: The Federal Reserve is expected to reduce interest rates by a quarter-point at its meeting Wednesday after holding steady at a range of 4.25%-4.5% since last December. Fed officials remain wary of fueling inflation, which accelerated from 2.7% to 2.9% (CPI) in August due largely to tariffs. But the softening labor market has coalesced support around lowering rates sooner rather than later. The makeup of the voting members also grew more dovish (in favor of lower rates) with the addition of White House economist Stephen Miran in a Senate confirmation vote Monday night.
- Job market weakens: A series of economic reports confirmed that the long-buoyant labor market has stalled. The economy added just 22,000 jobs in August and a revision showed a decline of 13,000 in June – the first time the labor market shed jobs since late 2020. The number of people filing initial applications for unemployment insurance reached the highest level (263,000) since 2021 in the first week of September, a sign that layoffs are rising. Unemployment ticked up to 4.3%, the highest in four years but still low by historical standards.
- AI and tech boost markets: Investors’ enthusiasm for artificial intelligence stocks and optimism about rate cuts powered the S&P 500 to five new record highs. The index added 2.5% by mid-September, pushing its 2025 return to 13.5% as it moves toward what would be a fifth straight month of gains. Oracle paved the way with a 36% single-day jump after reporting record results driven by a $300 billion cloud computing deal with OpenAI, whose spending spree is powering the tech industry. Overseas stocks still lead year-to-date: Emerging markets (+5.4% in September) are up 26.1% and international developed stocks (+2.3%) are just behind at 25.8%.
Chart of Interest
Key Takeaways
- Interest rates are expected to keep dropping steadily into 2026. The futures market as tracked by the CME FedWatch Tool forecasts Fed rate cuts at each of the next three meetings, starting Wednesday, and at least one additional reduction by March, which would lower the federal funds rate by a full percentage point from its current level to 3.25-3.5%. We believe the Fed could move more cautiously than that, however, if inflation rises more meaningfully or for longer from the impact of tariffs.
- Unemployed people (7.24 million) now outnumber available jobs (7.18 million) in the U.S. for the first time in more than four years, according to government data. The Bureau of Labor Statistics’ Job Openings and Labor Turnover (JOLTS) survey showed that the ratio of job vacancies to unemployed workers fell below 1 to 0.99 in July, the lowest since April 2021 when it was 0.96. The weakening job market provides the catalyst for the Fed to begin cutting rates again.
- The economy has moderated but remains healthy, as reflected in the Atlanta Fed’s estimate of 3.1% GDP growth in the third quarter. Scant evidence has yet surfaced of a surge in layoffs or unemployment, and the tariff-induced increase in inflation should be short-lived and comparatively modest.
- A government shutdown is increasingly possible with Republicans and Democrats in Congress at loggerheads over healthcare spending as a September 30th deadline to approve federal funding nears. Past shutdowns have mostly been brief and not disruptive to markets. The S&P 500 rose 10.2% during the record 35-day shutdown in December 2018 and January 2019, the most recent closure and the longest in U.S. history.
- New 2025 tariffs have raised $88 billion in revenue year-to-date through August, including $23 billion last month alone. The actual average effective U.S. tariff rate in August was about 11.5%, according to the Yale Budget Lab – up from 2.4% at the start of the year. Markets have risen steadily since a big pullback in April, indicating that investors have set aside initial worries about tariffs and focused more on the resilient corporate earnings and surging capital expenditures related to AI.
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