Last week, the highly anticipated nonfarm payrolls report for August came in softer than expectations, printing just 22k jobs versus the consensus of 75k. Coupled with the downward revisions of -21k to prior months, the three-month average payroll is just under 30k, well below the pace needed to put downward pressure on the unemployment rate. This marks a sharp reversal from the robust labor market seen earlier in the year, which had been buoyed by a string of upside surprises in employment data through late 2024.
The shift in the health of the labor market is notable, especially as it coincides with other signs of labor market cooling. Job openings continue to decline, with the latest JOLTS data showing 7.2 million openings compared to 7.4 million unemployed — a ratio that has now turned negative after peaking at above 10 million in the post-pandemic recovery.
The softening in employment data reinforces a dovish outlook for the FOMC. Interest rate markets are now pricing in a total of six rate cuts through early 2027, a notable shift in expectations compared to just a few weeks ago. Treasury Secretary Scott Bessent’s assertion from less than a month ago that “we should probably be 150 basis points lower” has quickly moved from contrarian to consensus. The market’s embrace of a lower rate trajectory reflects not only the labor data but also broader signs of economic deceleration, and it suggests that the Fed may have more room to ease than previously thought.
Meanwhile, longer-maturity yields have remained remarkably stable. Since the Fed officially ended its hiking cycle in July 2023, the 10-year Treasury yield has hovered around 4.3%. This range-bound behavior has been more pronounced this year as interest rates have been stuck between two dynamics — on one side, the drag from slowing growth, and on the other, the inflationary risks posed by tariffs. Recent labor market developments have shifted the balance, with the distribution of rate outcomes for the remainder of the year now tilted toward the downside.
One area that may offer clues about whether we are truly in a regime change is the mortgage-backed securities (MBS) market. MBS spreads have recently tightened, approaching their narrowest levels since 2023. A decisive move lower could signal the onset of a new phase of Fed easing — one that not only supports rates and MBS valuations, but also drives broad-based strength across the entire spectrum of spread sectors.
Originally published September 9, 2025
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