Developed Countries

The PCE/CPI gap is an increasingly important factor driving the near-term outlook for Fed policy. We discuss the drivers of that gap and conclude that it’s likely to narrow in the coming months.

 

Despite recent increases, long-maturity Treasury yields are roughly consistent with fundamental fair value. We see limited value in long duration plays.

July’s CPI reading was low enough to keep the Fed on hold for now, but near-term upside inflation risks remain.

The evidence is increasingly clear that swings in labor supply, mostly related to immigration enforcement policy, have been the primary driver of nonfarm payroll growth during the past two years.This remained true in the July report which showed declines in both nonfarm employment (-23k) and the unemployment rate (from 4.19% to 4.09%). The driver of both moves was a 264k drop in the size of the labor force.When labor supply is this volatile, we should downplay measures of job growth and pay more attention to measures of labor market utilization.Measures of labor market utilization look broadly stable. The unemployment rate is trending down, but the prime-age (25-54) employment-to-population ratio has weakened, and the numbers of marginally attached and involuntary part-time workers are rising.We don’t think this morning’s jobs report reduces the odds of a September rate hike which, in our view, remain high. Next week’s July core CPI report will be a more important driver of near-term Fed policy.Please click here to access our US Labor Market Chartpack for more details on US employment trends. 

Our Portfolio Allocation Summary for August 2026.

Special Report

Over the past 10 years, Japan’s profit margin expansion has been driven neither by advances in labor productivity nor by operational efficiency gains, but by massive currency devaluation and lower depreciation charges. Going forward, higher wages and unit labor costs, as well as currency appreciation, will become major headwinds to margins. 

Despite today’s hold, the bar for a rate hike in September remains low and contingent on the next two core CPI reports.