The Weekly Macro Outlook: The Fed’s New Calculus (w/c 8 September 2025)
The key events shaping this week: US CPI & PPI (Aug), ECB monetary policy meeting
Recap from last week: Confirming Downside Labor Market Risks
Fed Chair Powell’s speech at Jackson Hole revealed the Fed Chair’s new calculus: a shift in the balance of risks. This is an important lens for assessing the implications of last week’s US labor market data. The Fed is no longer in a “wait and see” mode. The slowing payroll numbers—regardless of the nuance in the household survey—have tipped the balance of risks in the labor market. The Fed’s concern is now focused on the shifting trajectory of the labor market, and Powell has signalled that they will act to ensure a slowdown doesn’t become a more severe, self-reinforcing deterioration.
Importantly, the US payroll data for Aug likely confirmed for the FOMC that downside risks to employment are rising. Non-farm payroll growth of +22k was much lower than the +74k expected for Aug. The revisions to Jun and Jul were also a net negative -21k, confirming that payroll growth has remained slower than previously reported, with payrolls now contracting in Jun by -13k. A clearer trend has emerged after the revisions: that payroll growth has essentially stalled since Apr 2025.
Aggregate hours worked were little changed in Aug. However, the stronger increase in Jul was revised lower to +0.1% over the month. The trend in aggregate hours worked has slowed since May, but remains steady over the last two months. Average hourly earnings have also remained fairly steady at +0.3% over the month, versus +0.3% in Jul. Together, slower payroll growth, steady hours, and modest hourly earnings growth paint a picture of more modest, but still positive, nominal income growth over the last two months.
The view of employment and unemployment in the household survey shows a more mixed picture, and even some important pockets of underlying resilience. The household survey showed that unemployment across the broader labor market demographic of 16yrs+ edged higher from 4.25% in Jul to 4.32% in Aug – a YTD high for the unemployment rate, which has been on a rising trend since late 2022. Across this broader demographic, participation and the employment to population ratio have also moved more notably lower since Apr this year.
However, the core working age group of 25-54years is reflecting a surprising degree of resilience. The unemployment rate was little changed at 3.6% in Aug – marginally above where it was a year ago at 3.56%. This was in spite of the more notable increase in participation this month, back up to 83.7% and just below the peak of 83.9% recorded a year ago. Importantly, the employment situation remains steady with the employment to population ratio remaining at 80.7%, unchanged from the start of the year. A year ago, the employment-to-population ratio was 80.9%, which was the peak in this post-pandemic cycle. So employment levels among the core working age group are still elevated and point to a still solid underpinning for the labor market.
Other reports, though, provide a more cautious backdrop for the labor market. The JOLTS data reflected the step down in labor market conditions in Jun and, at least some stabilized conditions in Jul. The fall in job openings in Jul provides a concerning view for a continued moderation in labor demand. The Challenger Job Cut announcements increased in Aug, suggesting pressure on layoffs on the horizon. For now, most of these layoffs still reflect “DOGE” actions; however, “market and economic conditions” are the second-most cited reason for job cut announcements. At the same time, hiring announcements remained subdued.
While signals from the labor market have continued to highlight downside risks, the US S&P PMIs were a little more resilient in Aug. The S&P PMIs showed improved momentum in manufacturing activity while services activity continued to expand at a moderate pace, edging down slightly. However, risks remain elevated. The uptick in manufacturing activity was in part fuelled by inventory, and not purely a sign of rebounding demand growth. Risks around inflation remain elevated due to tariffs. Despite the strong output performance, business optimism for the year ahead fell to one of the lowest levels in three years, linked to uncertainty over demand caused by government policy, particularly tariffs.
The anecdotes from the Fed’s Beige Book reported little or no change in economic activity since the prior period. Consumer spending was flat. Most districts reported little or no net change in employment over the last six weeks, noting firms’ reluctance to hire due to weaker demand or uncertainty. Price growth was described as moderate or modest. However, “most Districts” reported that firms were expecting price increases to continue in the months ahead.
Overall, the broader growth backdrop eased somewhat last week amid some of the crosscurrents in Aug activity data. The Atlanta Fed GDP nowcast edged down to a +3% run rate so far in Q3 – still a robust pace of growth.
Against this backdrop, a clearer picture is emerging of a stalling labor market within an economy that is navigating significant uncertainty and an unpredictable policy landscape. While the stalled hiring has not yet resulted in a sharper rise in layoffs or unemployment, that risk may be increasing.
Outlook for the week ahead: US CPI & PPI for Aug, ECB Monetary Policy meeting
This leads us to the second part of the Fed Chair Powell’s new calculus: a greater willingness to “look through” persistent inflation. At Jackson Hole, Fed Chair Powell shifted further toward the view that tariff-led inflation could be “relatively short-lived,” as these effects pass through to consumer prices. This sets the scene for the week’s US CPI and PPI reports for Aug, which may offer more clarity around how much of this persistent inflation is genuinely due to tariffs working their way through the supply chain. There is, however, an argument that tariff-led inflation will take longer to flow through to consumer prices. The inflation data, when combined with the Aug labor market data, will provide a more complete view of the Fed’s task next week: a labor market with rising downside risks existing alongside a persistent, but perhaps manageable, inflation situation.
Key factors & events to watch this week:
US Inflation
US inflation data is broadly expected to remain little changed over the year. Together, the CPI & PPI reports will provide a read-through to the Fed-preferred PCE inflation measure for the FOMC meeting next week.
- The US PPI for Aug will be released ahead of the CPI this week. Headline PPI is expected to slow to +0.3% over the month from +0.9% in Jul. Annual headline PPI is expected to remain unchanged at +3.3%.
- Core PPI is also expected to slow to +0.3% over the month from +0.9% in Jul. Annual core PPI is expected to slow to +3.5% in Aug from +3.7% in Jul.
- Headline CPI is expected to increase to +0.3% in Aug, from +0.2% in Jul. Annual headline CPI is expected to edge higher from +2.7% in Jul to +2.85% in Aug.
- Core CPI is expected to increase by +0.3% in Aug, unchanged from the pace in Jul. Annual core CPI is also expected to remain at +3.1%.
US Labor Market
- We continue to track the evolution of initial claims and continuing claims data. Initial claims are expected to remain little changed at +234k this week, after rising to +237k in the last week of Aug. This is now back above the 12-week average. Continuing claims for the week ending 23 Aug were little changed at 1.94m.
- The Conference Board Employment Trends Index for Aug will provide further context for last week’s US labor market reports.
- The BLS will also release its preliminary benchmark revision to the Payrolls Survey.
US Fed Speeches
It is the blackout period for Fed speeches ahead of the FOMC meeting next week. The confirmation of Stephen Miran to the Board of Governors remains on the fast track, with further news on the appointment likely this week.
ECB Monetary Policy Meeting
- The ECB is expected to keep policy settings unchanged, with the Deposit Facility Rate at 2%.
- Last week, Euro area CPI for Aug came in slightly higher than expected at +2.1%, edging above the 2% target, while the monthly pace increased by +0.2% after 0% in Jul. Core CPI remained at +2.3% against expectations of a fall to +2.2%, as the monthly pace also jumped to +0.3% after falling in Jul. Euro area Q2 GDP growth was confirmed at +0.1%, slowing from +0.6% in Q1.
This week, the US Treasury will auction and settle approx. $490bn in ST Bills, raising approx. $36bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond this week – all will settle next week.
QT this week: Approx $8.6bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
MCP Market Update: September 8th, 2025 – Grinding higher
The Weekly Macro Outlook: The Shifting Balance of Risks (w/c 1 September 2025)
The key events shaping this week: US labor market data for Aug, ISM surveys, Fed Beige Book, Euro Area CPI Aug, Aus GDP Q2, Global S&P PMIs Aug.
Recap from last week: US Inflation & Growth Amid a Shifting Balance of Risks
One of the clearest messages from Fed Chair Powell’s Jackson Hole speech was the shift in his view of the balance of risks. In the near term, he noted that risks to inflation are tilted to the upside, while risks to employment have become tilted to the downside. This led Fed Chair Powell to adopt a “proceeding carefully” approach to adjusting its policy stance and signalled a cut likely at the Sept FOMC meeting.
“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Fed Chair Powell, Jackson Hole speech 22 Aug 2025
Powell offered two reasons for his shift. Firstly, he noted that the slowing demand and supply of labor suggested that downside risks to employment are rising. Secondly, he acknowledged that while tariff impacts on consumer prices were “clearly visible”, what was more important for monetary policy was whether these increases raised the risks of an ongoing inflation problem. He noted Governors Waller and Bowman view that a “reasonable base case” is that inflation impacts from tariffs will be relatively short-lived.
Governor Waller’s speech last week added to this cautious, but forward-looking tone. Governor Waller continued to push for recommencing rate cuts, advocating for a move towards a more neutral stance. He did, however, temper that by remaining data dependent on how quickly to move the policy rate to a more neutral setting. While he remained data-dependent on the pace of policy adjustments, he did not believe the Fed had fallen “substantially” behind the curve. Waller indicated that he supports a cut at the upcoming Sep meeting and anticipates additional cuts over the next three to six months, also appearing to take a cautious approach.
This shift in the Fed’s perspective means that the evolution of the upcoming data, including last week’s US inflation and growth data and this week’s labor market data, will be important for how the Fed may navigate a more equal weight to the risks on both sides of its mandate.
Last week’s Fed-preferred PCE inflation data showed persistent inflation pressure, but a significant acceleration was not evident. Both headline and core PCE inflation came in as expected, with headline PCE edging slightly higher to +2.6% while core PCE increased to +2.9% over the year. Most of the inflation pressure in the month was centred back on core services, which did accelerate to +0.4% over the month and to +3.5% over the year. Core goods inflation, where we’d expect to see some tariff-led effects, remained flat over the month, but accelerated to +1.1% over the year. Other important measures of underlying inflation indicate some easing in inflation this month, but remained firmer over the year after increasing since May. It’s likely still too early to see the full, broad-based tariff impacts, as they are likely to have a rolling effect. For now, the inflation picture remains one of persistence and likely supports Chair Powell’s view for the need to “proceed cautiously”.
Last week, several indicators suggested some improvement in the growth backdrop, supporting a more positive view for the economy. Firstly, Q2 GDP was revised higher to an annualized pace of +3.3%. This was led by a small upward revision from personal spending, but mostly from fixed investment spending. This was followed by a step higher in the latest Atlanta Fed GDP nowcast for Q3 growth, which increased last week to a +3.5% run rate. The main contributors to the faster Q3 growth so far in the quarter were from net exports and non-residential investment spending. Importantly, personal spending and income growth also firmed in Jul.
With inflation remaining persistent and growth showing signs of resilience, our focus now shifts to the other side of the Fed’s mandate: assessing the overall health of the US labor market in the week ahead. The upcoming labor market data for Aug will be a crucial test of whether the recent signs of a slowdown are temporary or a new, more concerning trend.
Outlook for the week ahead: US labor market for Aug, US ISM PMIs, Fed Beige Book, Euro Area CPI Aug, Aus GDP Q2, Global S&P PMIs Aug
At Jackson Hole, Fed Chair Powell signalled a shift in which both upside inflation risks and downside employment risks have become equally prominent. The evolution of incoming data will be important for how the Fed may navigate this challenge to balance both sides of its mandate. With inflation remaining persistent, but not worsening, the US labor market update for Aug will be important, especially given the slowdown and revisions in Jul. The key question this week is whether the US labor market continues to weaken after the slowdown in job growth in Jul and the concerning downward revisions to payroll growth in May and Jun. Other US data will provide further input into the growth momentum of the economy in Aug, ahead of the next FOMC meeting on 16-17 Sep.
Outside of the US, data will continue to provide a comparative view of growth, inflation, and employment impacts with upcoming central bank meetings this month.
Key factors & events to watch this week
A broad view of the health of the US labor market.
Broadly, we’ll be looking for any changes to that “slow hiring, slow firing” dynamic that currently characterizes the labor market. While non-farm payroll growth and revisions will be important, there will also be some focus on data indicating changes in labor supply.
- US non-farm payroll growth is expected to stabilize around +74k in Aug versus +73k in Jul. Revisions to Jul and Jun will be important to understanding shifts in the overall trend of payroll growth.
- The unemployment rate is expected to edge higher to 4.3% in Aug from 4.2% in Jul. Last month, the participation rate continued to edge lower to 62.2%, which helped to offset some of the weakness in employment growth, keeping the unemployment rate low.
- Avg weekly hours are expected to remain unchanged at 34.3 in Aug.
- Avg hourly earnings are expected to increase by +0.3% over the month and remain around +3.9% over the year.
- Job Openings via the JOLTS report for Jul is expected to slow to 7.24m in Jul from 7.43m in Jun (data lag by a month).
- The Challenger job cut announcements are expected to continue to ease.
- Initial claims are expected to remain unchanged at +229k over the week ending 30 Aug. So far, continuing claims have remained elevated – reflecting an ongoing cautious hiring environment.
US manufacturing and services momentum.
Key data releases this week will feed into another update on US growth momentum so far in Q3.
- Both the S&P and ISM PMI surveys across manufacturing and services will provide a view of growth momentum midway through Q3.
- US factory orders for Jul are expected to fall by -1.3% in Jul after a -4.8% fall in Jun.
- The full international trade report for Jul will be released; the advance report showed a widening in the goods trade deficit as import growth rebounded while export growth remained subdued.
US Fed Speeches & Data
- There will be limited Fed speeches this week. It will be the last week of speeches ahead of the blackout period next week, before the FOMC meeting on 16-17 Sep.
- The latest Fed Beige Book for the six weeks since mid-Jul, will be released this week. This will provide a range of business anecdotes regarding sales growth, pricing, sentiment, and labor market views.
- Hearings for Stephen Miran, the nominee to replace FOMC member Governor Kugler, are expected this week. The confirmation is expected to be expedited to fill the position before the Sep FOMC meeting.
Global growth, inflation, and employment.
Outside of the US, labour market, growth, and inflation data will be important ahead of several central bank meetings this month.
- The prelim Euro area CPI for Aug is expected to remain unchanged at 2%, versus 2% in Jul. Core CPI is expected to edge lower to +2.2% in Aug from +2.3% in Jul. The Euro area Q2 GDP is expected to be confirmed at +0.1%. ECB President Lagarde will give a speech early in the week at the ECB’s Legal Conference. The ECB meets on 10 – 11 Sep.
- Canadian labour market data for Aug is expected to show employment growth stabilized at +9k in Aug after falling -40k in Jul. The unemployment rate is expected to increase to 7% in Aug from 6.9% in Jul. The BoC meets in two weeks, just before the FOMC.
- Aus GDP for Q2 is expected to accelerate to +0.5% over the quarter. RBA Governor Bullock will give a speech after the GDP release (Technology & the Future of Central banking at the RBA). The RBA meets at the end of the month.
The broader suite of global S&P PMIs for August will be released this week, providing further insight into tariffs’ effects on global output, trade, prices, and business sentiment.
This week, the US Treasury will auction and settle approx. $739bn in ST Bills, Notes, and Bonds, raising approx. $160bn in new money.
QT this week: Approx $6.5bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
MCP Market Update: September 1st, 2025 – Wall of worry
