No. of Recommendations: 17
It's rare that I declare a trend change on METAR. It's like a weather reporter saying, "Put your summer clothes in the basement. Autumn has arrived."
The trend change is the meeting next week of the FOMC that will begin the next phase of reducing the fed funds rate. Federal Reserve chair Jerome Powell has resisted cutting the fed funds rate because inflation has been running high. But the BLS released their final update of 2024 employment last week and showed that employment was actually much lower than they had previously reported.
https://apnews.com/article/jobs-economy-revisions-...New data shows the US job market was much weaker than thought in 2024, and this year as well
By PAUL WISEMAN, AP News, Updated 9:59 AM PDT, September 9, 2025
WASHINGTON (AP) — The U.S. job market was much weaker in 2024 and early this year than originally reported, adding to concerns about the health of the nation’s economy.
Employers added 911,000 fewer jobs than originally reported in the year that ended in March 2025, the Labor Department reported Tuesday.
The department issues the so-called benchmark revisions every year. They are intended to better account for new businesses and ones that had gone out of business. The numbers issued Tuesday are preliminary. Final revisions will come out in February 2026.... [end quote]
Here are the employment details.
https://www.bls.gov/opub/mlr/2025/article/unemploy...While unemployment is still low it is gradually increasing. It's coincidental that the number of jobs lost is about the same as the number of immigrants ejected from the U.S. so the overall rate is unchanged. But Jerome Powell said that this is an unusual situation that could quickly shift to higher layoffs. The market took that as a statement that the Fed will shift its dual-mandate focus from minimizing inflation to maximizing employment.
Jerome Powell can take pride in the soft landing engineered by the Fed. The fed funds rate has been kept relatively stable as the Fed gradually whittles away its huge book of long-term bonds left over from QE. Previous shifts in the fed funds rate have been sudden, radical declines. The FOMC dot plot currently shows a gradual path to a lower rate of 3% by 2028.
https://fred.stlouisfed.org/series/FEDFUNDShttps://www.bankrate.com/banking/federal-reserve/h...However, President Trump has pressured the Fed to lower the fed fund rate immediately to 1.5%. Trump is in the process of trying to pack the Fed with a majority by falsely accusing Fed Board member Cook of fraud.
The options market assigns a 93% chance of a 25 basis point cut in the fed funds rate next week. The rest think there will be a 50 basis point cut. Plus two more cuts this year.
This ignores the fact that inflation is too high so real incomes are actually declining. The Cleveland Fed's Inflation Nowcast shows inflation over 3% in 3Q25.
Quarterly annualized percent change
Quarter CPI Core CPI PCE Core PCE Updated
2025:Q3 3.25 3.39 3.09 3.18 09/12
The Atlanta Fed's Underlying Inflation Dashboard is entirely in the red with every indicator more than 0.50 ppt above target. This isn't taking into account future inflation due to Trump's tariffs which will begin to hit bigly in the critical holiday shopping season which retailers need to stay profitable.
The entire market celebrated at the prospect of lower interest rates. Both stocks and bonds rallied in price. The Fear & Greed Index was Neutral. The trade turned to risk-on as stock and junk bond prices rose more than the 10 year Treasury price. VIX was low.
Note that it takes a flood of money for both stocks and bond prices to rise at the same time. (Instead of inversely.) The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows very loose conditions.
The Cyclically Adjusted P/E Ratio (CAPE Ratio) of the S&P500 is 40 as compared with the long-term median of 16. This is higher than the 2022 peak. The bubble continues to inflate.
The entire Treasury yield curve dropped. The yield curve has a positive slope from 2 years to 30 years. I'm amazed that the long bond yield has dropped since inflation will eat away at its real yield. The 10-Year Treasury Real Interest Rate is at the bottom of its recent channel and the TIPS yield is dropping.
USD dropped but is now stable. Gold has stabilized at a record high while silver is popping. Oil has risen to the top of its channel but it is too early to know whether it will break out. Natgas has been sinking since March.
The Atlanta Fed's GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 3.1 percent on September 10. This is a strong growth rate. Coupled with the high inflation rate and the historically moderate real yield of the 10 year Treasury there is no evidence that the current fed funds rate is restricting economic growth. A cut in the fed funds rate will lead to higher inflation.
We have seen this situation before where investors begin to stretch for yield and pay higher prices for both good and dubious investments because the safe return for cash is strangled.
The METAR for next week is sunny.
Wendy
https://www.cmegroup.com/markets/interest-rates/cm...https://www.clevelandfed.org/indicators-and-data/i...https://www.atlantafed.org/research/inflationproje...https://stockcharts.com/freecharts/candleglance.ht...https://stockcharts.com/freecharts/candleglance.ht...https://stockcharts.com/freecharts/candleglance.ht...https://stockcharts.com/freecharts/yieldcurve.phphttps://fred.stlouisfed.org/series/DGS10https://fred.stlouisfed.org/series/REAINTRATREARAT...https://fred.stlouisfed.org/series/DFII10https://www.atlantafed.org/cqer/research/gdpnowhttps://www.multpl.com/shiller-pe 