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Quick View: Oh, “that” labor market softness…

Head of Global Short Duration and Liquidity Daniel Siluk explains that while U.S. companies are hesitant to add new employees while under the cloud of tariff-related uncertainty, they have not resorted to layoffs as they await the potentially beneficial aspects of President Trump’s economic agenda.

Daniel Siluk

Head of Global Short Duration & Liquidity | Portfolio Manager


1 Aug 2025
7 minute read

Key takeaways:

  • While the weak July jobs report is worrisome on the surface, other forward-looking employment indicators are proving resilient, hinting at a corporate sector that is still anticipating an extension of the economic cycle.
  • The decision of whether to cut rates in September likely just got easier for the Federal Reserve (Fed) as three months of subpar jobs growth is likely sufficient reason for the U.S. central bank to resume its rate-reduction cycle.
  • With U.S. rates likely to fall, fixed income investors have the opportunity to modestly extend duration to lock in current yields and potentially participate in capital appreciation while also maintaining a level of global diversification by seeking exposure to jurisdictions at different stages of the economic cycle.

In its decision to hold its benchmark overnight rate steady this week, the Federal Reserve (Fed) cited the need to balance the potential inflationary impact of tariffs with the other pillar of its dual mandate: labor market stability. Chairman Jay Powell had stated that a solid labor market gave the Fed more time to gauge the ultimate impact of tariffs on inflation: Would it be a one-off adjustment or cement expectations for rising prices? As evidenced by Friday’s weak July jobs report, accompanied by gargantuan two-month downward revisions, the luxury of waiting lasted all of two days.

While the headline numbers may raise eyebrows, in retrospect, they should not be as surprising as many have made them out to be given the massive cloud that is tariff-related uncertainty hanging over the U.S. economy. The nature of the tariff rollout, including Thursday’s executive order to enact President Trump’s so-called reciprocal tariffs on a host of nations starting August 7, has largely paralyzed much of corporate decision making, including staffing.

Employment surveys are just that – surveys – and the sample size can at times miss nascent and unforeseen trends. We suspected a weaker month at some point, and at 73,000 new positions, July delivered. We also viewed relatively solid May and June payroll gains as ripe for downward adjustments, although the magnitude of the roughly 250,000 revision surprised many economists. If the Fed’s threshold for cutting rates is clear evidence of a softening labor market, they got it. In fact, one of the two dissenting votes in this week’s meeting, Christopher Waller, revealed that what drove him to favor a rate cut was evidence that private sector payroll growth was near “stall speed.”

Those seeking a more sanguine view of the labor market may also point to the unemployment rate rising only one-tenth of a percentage point, to 4.2%, in July. While that is well within the range associated with a steady economy, we should remember that the labor market is indeed a market, with both a supply and demand component. Research indicates that possibly as many as 1.65 million foreign-born workers have left the labor force since March. That drop in supply may mask a concurrent drop in demand, resulting in a steady jobless rate, but one that is based on a smaller pool of workers. We expect the Fed will work hard to better understand the true level of labor demand in coming months.

Worse than solid, better than shaky

Prior to Friday’s jobs report, forward-looking markets were pricing in slightly less than even odds of a September rate cut. In light of the newly revealed three-month soft patch – and three months make a trend – a 25 basis-point (bps) September reduction in the federal funds rate is all but a certainty. The market still anticipates another 25 bps cut by year’s end.

So, why not a bigger shift in expectations for the policy rate? The answer is that other, often leading, indicators of labor market health remain steady. After falling from their post-pandemic peaks, job openings – a sign of labor market strength – have stabilized. Importantly, there are scant signs of widespread layoffs. Taken together, these measures, along with the headline jobs report, align with economic orthodoxy: When facing uncertainty, companies are hesitant to add new employees but won’t cut staff for fear of being caught wrong-footed should the clouds clear and the cycle march on.

The noise caused by tariffs is emerging across other economic data releases. The first-quarter’s negative gross domestic product (GDP) print was a consequence of companies rushing to import goods in advance of looming tariffs – net imports are a drag on U.S. GDP. That reversed in the second quarter as imports collapsed, allowing net exports to be the driving force in the period’s 3.0% annualized expansion.

Taking the good with the not so good

Reconfiguring the long-standing global trading system was invariably going to cause both economic uncertainty and market volatility. And while the ultimate framework remains to be seen, as illustrated by Thursday’s federal appeals court hearing on the legality of President Trump having the authority to bypass Congress when applying tariffs, the cat is largely out of the bag, and the future is likely one of post-peak globalization and elevated trade barriers. Yet, this was always the risk posed by then-candidate Trump’s platform. The market still rallied in anticipation of his victory, and as recently as a few weeks ago, global equity indices were hitting record highs and corporate credits enjoyed rich valuations.

Granted, the degree to which Trump would launch a trade war was largely misunderstood by the market, but another key driver of investor optimism was the pro-growth aspects of his agenda, namely deregulation and extending the tax reforms from his first administration. We believe much of that optimism is still well founded. Case in point: The immediate expensing of capital expenditure has the potential to launch a wave of productivity-enhancing investment across the U.S. economy.

On the monetary side, a resumption of rate cuts could benefit growth in two ways: not only should it lower the cost of capital, thus incentivizing private-sector investment, but it should also lower the borrowing costs of the federal government, possibly dampening concerns about the rising deficits that forecasters expect will accompany the Trump administration’s economic agenda.

Even tariffs may not prove to be the body blow originally feared. Once certainty is established, each company and each industry can adopt a customized strategy on how to incorporate the levies into their operations. By spreading the burden of a 15% tariff across their global customer base, exporters to the U.S. (and domestic companies that import subcomponents) can potentially minimize the pass-through cost to end customers while also defending margins.

Positioning: Adding the right kind of risk in the right place

With the specter of tariff-related inflation hanging over markets for much of 2025, we have cautioned against extending duration in the U.S. fixed income market. Manageable agreements with major trading partners may enable the Fed to shift its bias away from inflation risk and toward labor market stability. The disappointing July jobs report has given the central bank the impetus to act. Consequently, we believe that investors now have the opportunity to modestly extend duration toward the middle – or the belly – of the U.S. Treasuries curve to lock in higher yield and participate in any capital appreciation that may occur as lower rates are priced in.

Relatedly, many of the investors that comprise the roughly $7 trillion in money markets should recognize that, given these vehicles’ ultra-short duration, the returns they’ve been happy with may eventually come down, and their existing holdings won’t benefit from a bump in bond prices.

With respect to corporate credits, we still believe that focusing on higher-quality issuance with sound balance sheets is appropriate. The cycle remains extended, and while the passage of the Big Beautiful Bill could provide the U.S. – and global – economy with a much-needed boost, it will take time for the possible benefits of these reforms to translate to economic growth. Tariff exposure matters here as it will take rigorous examination at the company and sector level for investors to gauge the levies’ impact on a specific organization’s financials. In this respect, price makers – companies able to pass along any tariff-related expenses – may be advantaged.

And lastly, in periods of transition such as this, investors must recognize that both bond and equity markets are global and that various regions are at different stages of the economic cycle. This should enable globally minded investors to fortify portfolios with additional diversification. This may be accomplished by leaning into jurisdictions that are biased toward easing monetary policy by extending duration. Alternatively, investors may add on credit or equity risk for those that stand to feel the tailwinds of renewed economic growth, likely provided by favorable policy or exposure to durable secular themes like artificial intelligence.

Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

Monetary Policy refers to the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.

Volatility measures risk using the dispersion of returns for a given investment.

IMPORTANT INFORMATION

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses

Fixed income securities are subject to interest rate, inflation, credit and default risk.  The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa.  The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

There is no guarantee that past trends will continue, or forecasts will be realised.

 

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