US jobs growth has slowed, with nonfarm payrolls increasing by only 22,000 in August. This comes with a downward revision of 21,000 for June and July. The three-month average now stands at 29,000, compared to 168,000 in 2024, sitting at the bottom of the Federal Reserve’s breakeven range. Unemployment has risen to 4.3% as labour force participation increases.
An annual benchmark revision indicates that nonfarm payrolls have been revised down by 911,000 as of March 2025, suggesting that job creation over the prior year was overestimated. This revision poses a risk of current employment figures being overstated. Inflation remains a concern, with the headline Consumer Price Index (CPI) up by 0.4% month-on-month and 2.9% year-on-year.
Inflation Concerns
Core CPI stands at 3.1% year-on-year, with core goods inflation rising at an annualised rate of 3% over 3 months. Retailers and wholesalers have been absorbing costs, but the burden of increased tariffs has doubled in August. Services inflation, excluding energy, is up by 3.6% year-on-year. The Federal Open Market Committee is expected to focus on economic projections and risks, with a 25 basis point rate cut anticipated to address employment concerns, despite inflation pressures.
The jobs market is flashing serious warning signs with August payrolls coming in at a mere 22,000. We also saw a massive downward revision of 911,000 jobs for the year ending in March 2025, suggesting the economy was much weaker than we previously thought. This puts the Federal Reserve in a tough spot for its meeting next week, as inflation remains stubbornly high.
We see the market has almost fully priced in a 25 basis point rate cut, with the CME FedWatch Tool showing a 90% probability for the move. However, the real risk is in the Fed’s commentary, as officials seem more concerned about Core CPI holding at 3.1% than the slowing job growth. This creates a potential for a “hawkish cut,” which could surprise markets expecting a more dovish tone.
This conflict between weak growth and persistent inflation is a recipe for higher market volatility. The VIX index has already crept back above 19, reflecting increased nervousness among traders heading into the Fed meeting. Buying options to protect against sharp moves, or to profit from them, appears to be a prudent strategy in the coming weeks.
Market Sentiment and Strategies
For equity index traders, the risk seems skewed to the downside, as the recent slowdown in weekly jobless claims to 245,000 reinforces the weakening labor market. We think buying put options on the S&P 500 or Nasdaq 100 offers a well-defined risk strategy against a negative reaction to the Fed’s guidance. This situation is reminiscent of late 2023, when the market repeatedly got ahead of itself on rate cut expectations.
Looking at the bond market, the yield curve remains inverted, with the 2-year Treasury yield at 4.5% while the 10-year is at 4.1%. This has historically been a reliable recession indicator, preceding downturns like the one we saw in 2008. Traders could consider call options on long-duration Treasury ETFs to position for a flight to safety if economic data worsens further.
