Last week, the highly anticipated nonfarm payrolls report for August came in softer than expectations, printing just 22k jobs versus the consensus of 75k. Coupled with the downward revisions of -21k to prior months, the three-month average payroll is just under 30k, well below the pace needed to put downward pressure on the unemployment rate. This marks a sharp reversal from the robust labor market seen earlier in the year, which had been buoyed by a string of upside surprises in employment data through late 2024.

The shift in the health of the labor market is notable, especially as it coincides with other signs of labor market cooling. Job openings continue to decline, with the latest JOLTS data showing 7.2 million openings compared to 7.4 million unemployed — a ratio that has now turned negative after peaking at above 10 million in the post-pandemic recovery.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BLS

The softening in employment data reinforces a dovish outlook for the FOMC. Interest rate markets are now pricing in a total of six rate cuts through early 2027, a notable shift in expectations compared to just a few weeks ago. Treasury Secretary Scott Bessent’s assertion from less than a month ago that “we should probably be 150 basis points lower” has quickly moved from contrarian to consensus. The market’s embrace of a lower rate trajectory reflects not only the labor data but also broader signs of economic deceleration, and it suggests that the Fed may have more room to ease than previously thought.

Meanwhile, longer-maturity yields have remained remarkably stable. Since the Fed officially ended its hiking cycle in July 2023, the 10-year Treasury yield has hovered around 4.3%. This range-bound behavior has been more pronounced this year as interest rates have been stuck between two dynamics — on one side, the drag from slowing growth, and on the other, the inflationary risks posed by tariffs. Recent labor market developments have shifted the balance, with the distribution of rate outcomes for the remainder of the year now tilted toward the downside.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

One area that may offer clues about whether we are truly in a regime change is the mortgage-backed securities (MBS) market. MBS spreads have recently tightened, approaching their narrowest levels since 2023. A decisive move lower could signal the onset of a new phase of Fed easing — one that not only supports rates and MBS valuations, but also drives broad-based strength across the entire spectrum of spread sectors.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Over the past month, the labor market has taken center stage in the debate over the near-term trajectory of Fed policy. With inflation not showing a meaningful pickup in aggregate, jobs data may be the lynchpin for near-term rate cuts. If employment weakens meaningfully, the Fed gains cover to ease; if not, they risk waiting too long.

One under-the-radar but powerful signal is the Conference Board’s “Jobs Hard to Find” measure. It comes from the monthly Consumer Confidence Survey, where respondents are asked whether jobs are plentiful or hard to get. The index is constructed as the share of people who say jobs are difficult to find. While it’s a sentiment-based indicator, it has a strong historical correlation with the unemployment rate, jobless claims, and payroll growth. In fact, it often leads official labor data, since consumers are reporting what they experience in real time rather than waiting for lagging statistics to catch up.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BLS, Conference Board 

Lately, this signal has turned meaningfully higher. The “Jobs Hard to Find” share has been grinding upward and now sits at its most elevated level since the early post-pandemic recovery. In past cycles, similar moves foreshadowed tougher labor prints ahead. Households may already be picking up on a slowdown that the official data will confirm later.

If the survey is picking up on true labor weakness, this strengthens the Fed’s case for a series of rate cuts starting this month. At the September FOMC meeting, Powell and his colleagues will have to balance the threat of tariffs on inflation against a labor market that looks increasingly vulnerable. The “Jobs Hard to Find” measure may prove to be one of the early warnings that the cycle has shifted.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The second-quarter earnings season offered a revealing snapshot of the US retail landscape. Retailers reported resilient consumer demand, driven more by pricing than volume. Comparable sales were broadly positive, with value-oriented retailers outperforming amid inflationary pressures and shifting consumer priorities.

Value retailers like WMT saw gains in both volume and pricing. Walmart (WMT) and off-price retailer TJX posted the strongest results, with comparable sales rising 4.6% and 4.0%, respectively. These value-focused retailers have consistently outperformed in a high-inflation environment, with each delivering 10 consecutive quarters of at least 3% growth. In contrast, more discretionary retailers like Target (TGT) continued to lose market share, with comparable sales declining 1.9% this quarter.

Home improvement retailers Home Depot (HD) and Lowe’s (LOW) both returned to positive comparable sales, reflecting some pent-up demand as the housing market begins to benefit from expectations of lower interest rates. A closer look at comparable sales reveals that much of the growth was driven by average ticket increases rather than higher transaction volumes. This trend was especially pronounced at HD and LOW, where:

• HD saw transactions decline 0.4%, offset by a 1.4% increase in average ticket.
• LOW experienced a 1.8% drop in transactions, countered by a 2.9% rise in ticket size.

Retailers are navigating a delicate balance — maintaining sales momentum while facing rising costs, particularly as tariff impacts begin to take hold. These impacts vary by retailer, with discretionary-heavy businesses (e.g., apparel and electronics) facing far greater tariff exposure. Tariffs are also highlighting the importance of scale and supply chain agility, both of which remain critical in mitigating cost pressures. Some retailers are destocking excess inventory purchased pre-tariff, leading to rising costs in the back half of the year. Others are experiencing upfront tariff impacts and are actively shifting supply chains away from China and other high-tariff jurisdictions while leveraging pricing strategies. WMT notably increased its inventory year-over-year in fiscal Q4 2025 and currently holds inventory 3.8% higher than the prior year. However, as WMT replenishes stock at post-tariff price levels, it is seeing weekly costs increase. Whether costs are absorbed in margin or passed on to the consumer is a question for the fourth quarter.

Tariffs are emerging as a key challenge, pressuring margins and prompting supply chain shifts, especially for retailers with heavy exposure to China. As costs rise and inventory strategies evolve, the sector faces a critical test heading into the holiday season, where agility and scale will be essential for maintaining profitability.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Fed Chair Jerome Powell’s speech at Jackson Hole last week marked a clear pivot from prior Fed communications, striking a more dovish tone than markets had expected. For much of this year, Powell emphasized patience and a cautious approach to easing. At Jackson Hole, he pivoted, acknowledging that the balance of risks has changed and that with inflation closer to target and policy already restrictive, “adjustments may soon be warranted.”

This shift did not come in a vacuum. Labor market data in recent months have been weaker than previously thought. Headline payroll gains have slowed sharply — from an average of over 200,000 per month in 2023 to just 35,000 in the most recent release — and downward revisions have erased much of the strength reported earlier in the year. The unemployment rate has edged up to 4.2%, and Powell described the current state as a “curious kind of balance,” one that results not from robust momentum but from a simultaneous slowing of both labor supply and labor demand. Such conditions, he warned, can tip quickly, raising the risk of a sharper deterioration.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BLS 

Overlaying these cyclical concerns was a structural change in the Fed’s policy framework that was scheduled for this year. Powell confirmed the Fed is abandoning the “average inflation targeting” approach it adopted in 2020. That framework — designed for a world of weak demand, low interest rates, and chronic undershooting of inflation — allowed inflation to run above 2% for a time to make up for earlier shortfalls. The aim was to lift long-term inflation expectations and prevent premature tightening. But the post-pandemic economy is different. Tariffs have reshaped global trade, immigration has slowed, and repeated supply shocks have altered the complexion of inflation. In this environment, tolerating overshoots risks embedding inflation rather than raising expectations. Powell announced a return to a more traditional 2% target — flexible enough to acknowledge real-world frictions, but without the asymmetric bias that tolerated prolonged overshooting.

The combination of a stricter-sounding framework and a dovish policy stance may seem contradictory, but it reflects the Fed’s evolving calculus. Inflation is moving toward the target faster than expected, while the costs of holding policy at restrictive levels are rising. The new framework restores credibility to the Fed’s inflation objective, even as Powell’s tone makes clear that the near-term priority is guarding against unnecessary damage to employment. The timing of the shift is telling. It signals that the Fed is ready to exit the “higher for longer” phase and transition toward gradual easing, with September now squarely in play.

Political pressure provides another important backdrop. The White House has been calling for rate cuts to support growth and jobs, placing the Fed in a delicate position. Powell avoided any explicit reference, but by emphasizing labor-market risks and pointing to the downside of waiting too long, he effectively acknowledged the broader context. Maintaining independence while responding to real economic weakness is a fine balance, and Jackson Hole was Powell’s attempt to walk that line.

Markets took him at his word. Treasury yields fell across the curve, led by the front end, as traders quickly priced in a near-certain September cut. The yield curve began to steepen, reflecting expectations of a lower policy path and a Fed that is more responsive to growth risks than previously assumed. Real yields rolled over, and credit markets tightened in anticipation of an easier stance.

For fixed income investors, the debate is no longer about how long the restrictive policy will remain, but how fast the easing cycle will unfold and how far the Fed will ultimately go. The chart below shows the market implied probability of a Fed cut at the September meeting, which has hovered in a range since February. Following a steady decline after the latest weak labor data revisions, the market is now pricing in an 86% probability of a rate cut at the September FOMC meeting.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

The message from Jackson Hole is clear: the Fed is pivoting from restraint to readiness. Inflation progress has given Powell room to maneuver, while weakening labor data and revisions have made the costs of inaction harder to ignore. September may well mark the start of a new phase in monetary policy — one where the focus shifts from fighting inflation at all costs to managing the risks of an economy that is already slowing.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

One of the most important but often overlooked macroeconomic shifts in recent years is the changing role of federal government spending in driving the real economy. While headlines tend to spotlight deficits and debt ceilings, the bigger story lies in how much the government spends relative to the size of the economy. This ratio, known as federal outlays-to-GDP, plays a critical role in shaping growth and increasingly shifts the responsibility for sustaining expansion onto the private sector.

As federal spending slows, the economy faces a headwind — unless consumer demand, corporate investment, and productivity gains, especially from AI and automation, step in to fill the gap.

Tracking the Government’s Footprint

Federal outlays as a share of nominal GDP offer a clear view of the government’s fiscal footprint. This ratio has ranged from a low of 17.3% in FY 2000 (during the late-1990s budget surplus era) to a high of 31.1% in FY 2020, averaging 20.9% since 1981.

A notable shift occurred after the 2008 financial crisis. From 1981 to 2007, federal spending averaged 19.8% of GDP. Post-2008, that average rose to 23.1%, reflecting structural changes in how the government allocates funds. Entitlement programs, like Social Security and Medicare, have grown significantly, driven by demographic trends and expanded benefits. These programs now account for over 60% of total spending, up from 45% in 1981.

Meanwhile, discretionary spending has shrunk from 50% to just 25%, and interest payments have climbed to around 14% of the budget, up from a historical range of 8%-10%, due to rising debt and higher interest rates. Compared to the post-WWII average of 19.5% (1947-1980), today’s spending levels reflect a larger welfare state and more active countercyclical fiscal policy.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, US Treasury, BEA

The Slowdown and Its Implications

Federal spending growth is now decelerating. In FY 2024, total outlays rose 9.98% year-over-year, reaching approximately $6.75 trillion — up from $6.13 trillion in FY 2023. This increase was driven largely by mandatory programs and surging interest payments. But in FY 2025, growth is expected to slow to just 3.75%, with outlays projected at $7.0 trillion, according to the CBO’s January 2025 baseline.

This slowdown — more than a 6% drop in spending growth — places greater pressure on the private sector to sustain economic momentum. Returning the outlays-to-GDP ratio to its long-term average of 20.9% would require cuts of 2 to 3 percentage points of GDP, or roughly $600-$900 billion annually, based on projected FY 2025 GDP of $29-$30 trillion.

The impact of such cuts depends on fiscal multipliers, which the CBO estimates range from 0.5x to 2.5x depending on the type of spending. In other words, every $1 reduction in spending could reduce GDP by $0.50 to $2.50. Historical examples include the 2013 sequestration, which shaved 0.5%-1.0% off GDP growth, and Europe’s 2010-2012 austerity measures, which prolonged economic stagnation.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, US Treasury

Private Sector: Time to Step Up

With federal spending growth slowing, the private sector will need to take the lead in driving expansion. That means stronger consumer spending, increased business investment, and productivity gains, particularly from AI and automation, will be essential to offset the fiscal drag.

In the near term, the strength of the labor market and consumer spending will be key indicators of whether the private sector can carry that weight. If these areas hold up, they could help sustain growth even as the government pulls back.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The Q2 2025 earnings season delivered a complex but revealing snapshot of corporate performance across sectors, shaped by resilient consumer demand, accelerating AI adoption, and emerging macroeconomic pressures. While many companies posted strong results, particularly in technology, healthcare, and consumer discretionary, others faced headwinds from tariffs, cost inflation, and shifting demand patterns. This summary distills key themes, offering a clear view of where momentum is building and where caution is warranted.

Resilient Consumer & Credit Quality

Banks and consumer finance companies showed broad improvement in asset quality across the FICO spectrum and product types, including subprime (BFH, OMF), near-prime (SYF, ALLY, COF), and prime issuers (AXP, JPM), while consumer spending trends remained favorable, especially in higher income cohorts. The resilient consumer led to the outperformance of financials through earnings season, illustrating that the bedrock of the economy remains fundamentally sound.

AI & Tech Leadership

Tech leadership continues to drive the market with blowout quarters from META, MSFT, and AAPL. AI-related growth remains a key focal point as data center development and AI infrastructure fueled year-over-year increases in capex; the outlook for the rest of 2025 remains strong, as AMZN reiterated its $32-$33 billion quarterly spend, and META slightly raised its FY25 capex guide while giving initial indications of an over 40% increase in 2026 to ~$100bn for the year. The knock-on effect of this growth in investment is expected to continue to provide support for ancillary industries, including energy and utilities. Non-AI related semiconductor companies such as TXN and MCHP, which have been operating near cyclical troughs, showed improving demand across industrial end markets outside of auto.

Tariff Impacts Emerging

The impacts of tariffs are beginning to emerge throughout sectors, with 2H25 guides incorporating lower profits, especially in industrials, consumer goods, and retail. The automotive sector has been disproportionately impacted, with Ford (F) announcing a further $500 million impact from tariffs, increasing its full year impact to $2 billion; GM reiterated a net tariff impact of $3.5 billion (at the midpoint), which accounts for between 35%-40% of Ford and GM’s normalized earnings (avg. of last 5 years). Other cap goods providers, such as CAT, also cited incremental tariffs of $1.3-$1.5 billion. Fewer net beneficiaries emerged, though Century Aluminum continued to show positive momentum for US aluminum smelting production as it plans to restart a plant in South Carolina, increasing US production capacity by 10%.

Sector Divergence

With the continuation of tech dominance and tariff impacts headlining 2Q25’s corporate earnings, dispersion among sector winners and losers continues to emerge. Strong earnings reports were seen throughout Communication Services (a sector that is relatively insulated from tariffs), Healthcare (which has yet to see substantive tariff announcements), and Utilities (a beneficiary of increased energy needs from AI data center builds). Within these sectors, trends have diverged in Healthcare as Health Insurers, especially those with large Medicaid, Medicare, and Marketplace businesses (CNC and MOH), saw spiking cost trends, which will require a multi-year recovery. On the other hand, Pharmaceuticals largely reported stable-to-improving trends. Energy companies saw weakness in the quarter given lower year-over-year commodity prices partially offset by higher production. Airline trends diverged as premium and international offerings helped industry giants such as DAL, while domestic demand remained relatively weak. Chemicals was a standout laggard as demand weakness and excess supply from China remain headwinds for the sector, with industry giant DOW reducing its dividend to support its credit profile and other companies reporting large misses and weakening outlooks (CE, TROX).

Clear skies with a chance of rain

Q2 2025 earnings reflected the influence of shifting trade policies, tax changes, and new spending priorities, with growth anchored by strong consumer demand and accelerating AI investment. Tariff pressures and sector-specific headwinds, however, introduced greater complexity and widened performance dispersion. Looking ahead, the balance between AI momentum, evolving trade dynamics, and consumer strength will define market direction.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

 

Given July’s recent payrolls miss and outsized negative revisions, the unemployment rate ticked up to 4.2% from 4.1% — stirring anxiety about whether the labor market is beginning to buckle after a period of extraordinary resilience.

But context matters.

The chart below plots quarterly data from 1948, comparing the unemployment rate to year-over-year real GDP growth. What stands out is that negative GDP prints have historically clustered when unemployment is above 5%. At the current level of 4.2%, we’re still comfortably below that threshold — and still in the territory that has typically coincided with economic expansion.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BEA, BLS

The current policy stance is restrictive, but it’s not becoming more so. Instead, markets have shifted their focus to how quickly the Fed will normalize. Currently, the pendulum of expectations has swung hard toward accommodation. Cuts in September, November, and December are nearly fully priced in. The easing path looks fully valued, leaving little room for any sign of stabilization in the labor market or upside inflation surprises. While yields remain asymmetrically biased lower — especially in a downturn or hard-landing scenario — they could push the pendulum back and reprice the front end higher.

Still, history suggests we’re not in dangerous territory yet. With unemployment below 5%, the backdrop leans toward expansion, not recession. But when the market is leaning this far in one direction, it takes little for the momentum to shift. With cuts fully priced in and yields already reflecting a dovish tilt, the near-term risk/reward around adding duration here warrants caution.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Last week’s payroll report delivered a sobering mix of disappointing data and significant downward revisions to the economic outlook. Nonfarm payrolls rose by just 76,000 in July, well below the consensus estimate of 110,000, while the unemployment rate ticked up to 4.2% from an expected 4.1%. While the headline miss drew attention, it was the revisions that had the greater impact: June’s figure was slashed to 14,000 from the originally reported 147,000, and every month in 2025 has now been revised downward.

Indeed, the July print saw revisions totaling 258,000, which is the largest negative revision since Covid. On Friday, President Trump fired the BLS chief after the outsized revisions. Whether it was politically motivated or not, nonfarm payroll numbers had been revised lower in 70% of the releases since 2022, which could point to a methodology issue.

Source: Sage, BLS, Bloomberg

Persistent downward revisions are not unprecedented, but they could signal inflection points in the business cycle. Periods such as late 2007 and mid-2001 saw similar patterns, where initial prints suggested stability, only to be followed by cumulative revisions that revealed a larger slowdown already in progress. This reflects the challenge of relying on real-time data — by the time the revisions are complete, the economy has often shifted meaningfully.

Historically, clusters of negative payroll revisions have coincided with an acceleration in the pace of policy easing. In 2001 and 2008, the revision trend influenced the Fed to acknowledge that labor conditions were deteriorating faster than expected, prompting larger and more rapid rate cuts. Even during softer mid-cycle slowdowns, such as in 1995 and 2019, sustained revisions acted as a catalyst for shifting policymaker expectations toward earlier accommodation.

At last week’s July FOMC Meeting, the Committee opted to leave rates unchanged, with two governors dissenting in favor of a cut — a level of Board-level dissent not seen since 1993. At the time, the labor markets appeared resilient and provided cover for patience. However, the latest jobs release and revisions undermine that premise and raise the possibility that policy is already behind the curve.

The rates market responded swiftly. Before the jobs data, pricing implied a more measured path of easing — just one full rate cut this year. Post-release, expectations shifted toward pricing in two full cuts in 2025 and five total cuts over the cycle. This still qualifies as a non-recessionary adjustment; a recession would presumably see multiple percentage-point reductions in the fed funds rate. The trajectory from here depends on whether the labor market is transitioning toward a slower-but-still-expanding economy or showing early signs of contraction. In both scenarios, the Fed cuts — in the first, to prolong the expansion with “insurance cuts;” in the second, more aggressively to offset recessionary pressures.

Source: Sage, Bloomberg 

The distinction is critical for markets. Easing policy with unemployment below 4.5% has historically been supportive for risk assets, as seen in mid-cycle adjustments like 1995 and 2019. By contrast, easing into a recession — as in 2001 or 2008 — carries an entirely different risk-reward profile. For now, the bias for interest rates is lower, but the underlying cause will determine whether the adjustment is a tailwind or a warning for credit and equities.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The Federal Reserve is often perceived as a monolith. Policy decisions are usually described in collective terms — “the Fed raised rates,” “the Fed is watching inflation” — as if the institution speaks with a single voice. But that perception may soon be tested with attention shifting to the Fed’s future composition.

While President Trump recently ruled out firing Chair Powell — reducing the likelihood of a near-term leadership shake-up — the Fed’s evolving makeup and internal dynamics will be important to watch. What’s at stake isn’t just the direction of monetary policy, but how markets respond to a potentially more divided and politically influenced Fed. Leadership changes could have profound implications for interest rates, inflation expectations, and asset prices.

The FOMC’s structure reflects a balance between centralized authority and regional input. Twelve members vote on policy decisions: seven governors appointed by the President and confirmed by the Senate, the New York Fed president (a permanent voter), and four rotating regional Fed bank presidents. While all 19 participants contribute to policy discussions, only the designated 12 cast formal votes.

Since the mid-1990s, FOMC votes have been marked by an extraordinary degree of unanimity, with most decisions passing 12-0 or with only a lone dissent. This consensus-oriented approach became a hallmark of the Greenspan era and has largely continued under subsequent Fed chairs.

But it wasn’t always this way. During the 1980s, dissent was more common — particularly among the Board of Governors. At the time, the Fed was grappling with double-digit inflation, volatile interest rates, and a credibility crisis. Governors frequently broke with the chair over the pace and severity of tightening measures, with some worried about recession risks and others pushing for even more aggressive action to tame inflation. The stakes were existential, and the ideological divides within the Committee were sharper. The shift toward near-unanimity in the 1990s reflected not only a calmer macroeconomic environment but also a deliberate cultural shift to manage expectations and reduce market noise.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Federal Reserve, Sage

Today, navigating the Fed’s dual mandate — maximum employment and price stability — is increasingly complex. While the labor market remains healthy, it is showing signs of slowing. At the same time, potential inflationary pressures from tariffs are expected but not having a major effect on inflation readings.

Market expectations suggest that Trump would favor a Fed chair who is explicitly dovish and aligned with his pro-growth agenda. This could mean faster and deeper rate cuts, marking a sharp departure from Powell’s focus on restoring price stability through restrictive policy. Such a shift would raise questions about the Fed’s independence and internal cohesion. While a more accommodative FOMC might boost equities and credit in the short term, it could also trigger a bear steepening, greater inflation volatility, and rising risk premiums if markets begin to doubt the Fed’s long-term commitment to price stability

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

So far, markets have largely discounted this risk. Implied volatilities for rates, credit, and equities remain near multi-year lows. But dissent signals more than disagreement — it signals uncertainty. A 9-3 or 8-4 vote, especially with dissent from governors, suggests diverging views on the economy, the policy path, or the influence of politics. That could lead to increased volatility around FOMC meetings, greater market sensitivity to economic data, and a wider range of scenarios for rates, the dollar, and risk assets.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Over the long-term, income is the dominant driver of returns for most fixed-income asset classes, and municipal bonds are no different. In order to further enhance the income component, investors can take on various types of risk premiums, including credit risk, duration, structural and liquidity, just to name a few. Over time and as markets evolve, the relative value of each of these risk premiums can shift, creating opportunities for investors.

Source: Bloomberg

Within the last year or so, we have seen a significant rise in the issuance of bonds with mandatory put features. These bonds are typically issued with a 25-to-30-year maturity but are required to be tendered on the mandatory put date, which is typically within 10 years from the issuance date, thus making the put date the effective maturity date. These types of structures can offer an additional 15-30 basis points of spread over a similar security without the put feature. We view this additional income as highly attractive for the majority of puttable securities, given that any additional risk normally associated with the bonds can be contained with proper security selection.

Source: Bloomberg

Common Reasons Why Puttable Bonds Trade With Wider Spreads

Visual complexity — Municipal bonds with mandatory put features introduce an additional degree of complexity that certain investors may not feel comfortable with, thus causing them to avoid the securities altogether.

Market Liquidity — Historically these bonds have been less liquid than comparable callable or bullet maturities, however a recent rise in issuance and broader investor participation has significantly increased the liquidity pool. In fact, the larger issuance size for these types of structures can even enhance their market liquidity.

Tender Date Liquidity — The issuer is required to repurchase the bonds at a predetermined price on the tender date. However, if they lack sufficient funds to do so or are unable to access the capital markets, they could default on this obligation. Investors can protect against this risk by only purchasing bonds with mandatory puts from issuers who benefit from sufficient liquidity to repurchase the bonds outright if they are unable to access the capital markets to reoffer the bonds at the tender date.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.