Weekly Investment Perspective

Markets opened the holiday-shortened week with cautious optimism: equity benchmarks briefly hit fresh highs mid-week as investors digested a sequence of cooler-than-expected economic signals that kept the prospect of Federal Reserve rate cuts alive. By Friday, indices gave back a bit of those gains—S&P 500 and Nasdaq ended the week slightly positive, up 0.33% and 1.14% respectively, while the Dow lagged, off 0.32%. Small caps also performed well, with the Russell 2000 rising 0.5% on Friday and up 1% for the week.

August’s nonfarm payrolls came in at a meager 22,000 new jobs—far below expectations—driving concern about the labor market’s durability. The unemployment rate rose to 4.3%, its highest level since 2021, and prior months’ job gains were revised downward. The jobs report lifted expectations among bond traders that the U.S. Federal Reserve is likely to cut its benchmark rate by a quarter point on September 17, with an outside chance of a steeper half-point cut. As of Friday afternoon, prices in rate futures markets implied an 86% probability of a quarter-point cut and a 14% chance of a half-point reduction.

The weaker payroll report spurred a bond market rally: yields declined markedly, and the U.S. dollar weakened to near six-week lows. While equities briefly rallied on renewed rate-cut hopes, late-week volatility reflected market uncertainty—whether accommodative policy signals would encourage confidence or underscore economic fragility. The average 30-year mortgage rate fell sharply following Friday morning’s weaker-than-expected jobs report. The drop from an average of 6.45% on Thursday to 6.29% on Friday marked the largest one-day decline since August 2024, according to Mortgage News Daily.

In other economic news, the Institute for Supply Management (ISM) reported that economic activity in the U.S. manufacturing sector contracted for the sixth consecutive month in August, albeit at a slower rate than in July. The ISM’s Manufacturing Purchasing Managers’ Index (PMI) came in at 48.7% for the month, up from July’s reading of 48% but below estimates for around 49.1% (readings below 50% indicate contraction). Importantly, the ISM Services PMI surprised to the upside, rising to 52.8% versus expectations for a decline, underscoring resilience in service-sector demand even as manufacturing remains under pressure.

Looking ahead, this week’s CPI, PPI, and real-earnings prints will sharpen the inflation picture and set the tone for the Fed’s September decision, though the cooling labor market reports have already set expectations for rates to move lower. At the same time, tariff policy remains a moving target amid recent legal challenges to the White House’s authority to act unilaterally on import duties. Markets may be in for a choppier ride near-term after the strong summer rally as investors weigh an easier Fed against growing cracks in the economic growth picture and unresolved policy risks.

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