Aggressive Rate Cuts = Premature

Key Takeaways

• Inflationary pressures are building despite recent soft spots in the economy.

• Macroeconomic and policy uncertainties are influencing labor dynamics.

• Credit conditions remain broadly issuer-friendly.

Employment Conditions: Mixed but Resilient

The US unemployment rate held steady at 4.2% in July, despite a sharp slowdown in nonfarm payrolls — down from 147k to 73k — alongside downward revisions for the prior two months. This fueled market bets on rate cuts and increased political pressure on the Fed.

Beneath the surface, the labor market still shows underlying strength:

• Hourly earnings rose 3.9% YoY.

• Labor participation remains steady at 62.2% in July versus 62.3% prior month.

• Underemployment edged up to 7.9% (from 7.7%), but this is still healthy by historical standards compared to the 11%+ levels pre-Trump 1.0 and sub-7% pre-Trump 2.0.

Jobless claims remain range-bound, signaling stability. However, ISM Services data paints a more cautious picture:

• Prices Paid Index rose from 67.5 to 69.9, signaling intensifying inflation pressures.

• Employment Index fell from 47.2 to 46.4, indicating softening labor demand.

• A reading above/below 50 signals expansion/contraction.

Bottom Line: Labor markets are cooling but not collapsing — supporting patience from the Fed.

Underemployment in the US: Ticking up but overall steady

Source: Bloomberg

Spending & Inflation: Upward Pressures Building

Retail control group spending rose 0.5% MoM in July (vs. 0.4% consensus), reflecting still-solid consumer demand. Meanwhile, Core PCE — the Fed’s preferred inflation measure — climbed to 2.9% YoY (vs. 2.8% prior), driven primarily by services inflation.

Goods inflation has lagged expectations, largely due to pre-buying and corporate cost absorption, but this is not sustainable. Tariff-related price increases are beginning to work through the system, with several bellwether companies signaling upcoming pass-throughs.

Additional inflation signals:

• Producer Price Index (PPI): +0.9% MoM, +3.3% YoY.

• Core PPI: +3.7% YoY.

• Import Prices: Stable on a pre-tariff basis, but costs are being absorbed by U.S. importers — a temporary buffer.

With more firms initiating price hikes, we expect consumer prices to face renewed upward pressure in coming months. This is already reflected in Core PCE trends, up 3.9% YoY in July.

Market Implications & Fed Outlook

Macroeconomic conditions remain healthy but gradually softening. Inflation dynamics are fluid, complicating the Fed’s policy path. For now:

• Equity markets: S&P 500 up +8.3% YTD.

• Credit markets: Remain risk-on with robust conditions for new issuances, refinancings, and repricings across leveraged loans, high yield, and private credit.

BrightSpring View: Calls for aggressive rate cuts are premature — the Fed still faces a delicate balancing act.

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