Macro Minutes: Three Questions for September

Three scheduled events in September will shape how investors think about the rest of the year: the August employment report on September 4, the August consumer price index on September 10, and the Federal Open Market Committee meeting on September 15 and 16. Equity markets enter the month near their highs, with the S&P 500 close to its 52-week high as of this writing. Rather than forecast the releases, we set out the three questions we are trying to answer.

Is the labor market cooling or merely normalizing?

After a period of unusually tight labor conditions, slower hiring can mean two different things. Normalizing describes a labor market returning to a sustainable pace: fewer job openings per unemployed worker, hiring that matches labor force growth rather than outrunning it, and wage growth settling toward a rate consistent with stable prices. Cooling is less benign: employers not merely hiring less but shedding workers, with unemployment rising and hours and wages under pressure.

The two cases show up differently in the data. In a normalizing market, payroll gains slow while the unemployment rate stays roughly stable, jobless claims remain low, and layoffs stay contained. In a cooling market, the unemployment rate drifts higher for several months, claims rise, temporary help and hours worked fall first, and revisions to earlier months turn negative. The difference is rarely visible in one report; it is visible in the pattern across several.

Markets have tended to treat the two cases differently. Normalization has historically been read as supportive, since it eases pressure on inflation without threatening corporate earnings. Cooling raises the question of whether earnings expectations are too high, and has tended to widen credit spreads and push longer-term yields lower as investors move toward safety. Which case we are in is the first thing we will look for on September 4, and we expect to need several more reports to be confident.

Is inflation progress durable?

Headline inflation measures the full basket of goods and services households buy. Core inflation removes food and energy, not because they do not matter to families, but because their prices swing with weather, geopolitics, and commodity markets in ways that say little about demand. Policymakers focus on core because it is the part of inflation that policy can most plausibly influence.

We look at trends rather than single prints for a simple reason: monthly inflation data are noisy. Seasonal adjustment is imperfect, a few categories can dominate a month, and one-time price changes can flatter or distort a reading. A hot month after a run of cool ones is a reason to pay closer attention, not to conclude that progress has reversed. The three-month and six-month annualized rates of core inflation, along with the breadth of categories moving in the same direction, tell us more.

Two reports this month bear on the question. The consumer price index arrives September 10, and the PCE price index, which the Federal Reserve uses to frame its inflation objective, arrives September 25. They are constructed differently and can diverge for months, so we read them together.

What is the yield curve saying?

The yield curve is the line drawn through the yields on U.S. Treasury securities of different maturities. In most periods it slopes upward: investors ask for more yield to lend for ten years than for two, as compensation for inflation uncertainty and tying up capital. An inverted curve, where short-term yields exceed long-term yields, says the market expects short-term rates to fall, usually because it expects weaker growth or lower inflation, or both.

Steepening is the reverse motion, and its cause matters. The curve can steepen because short-term yields fall as markets anticipate easier policy, or because long-term yields rise on stronger growth expectations or concern about government debt supply. Those are different stories with different implications for borrowers, savers, and the value of long-duration assets.

The curve is worth watching because it distills the expectations of a large and diverse set of investors into one observable shape. It is not a timetable. Inversions have historically preceded recessions with long and variable lags, and steepening has occurred both before and during downturns. We treat the curve as one input into our view of the balance of risks, alongside credit conditions, corporate earnings, and the labor market data.

What would change our view

Our working view as of this writing leans toward normalization rather than cooling, and toward inflation progress that is uneven but intact. We would revisit that if the unemployment rate rose in several consecutive reports alongside negative revisions and rising claims; if core inflation re-accelerated across a broad set of categories over three months rather than in a few; or if credit spreads widened meaningfully while equities remained near highs, a divergence that has often meant one market is mispricing risk. We would also take note if the curve steepened chiefly because long-term yields rose, since that raises financing costs whatever the central bank does.

Questions worth asking your advisor

• If the labor market is cooling rather than normalizing, which parts of my plan are most exposed?
• How does the bond portion of my portfolio behave if long-term yields rise while short-term yields fall?
• What would a period of sticky inflation mean for the spending assumptions in my plan?