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Navigating the Markets: Fed Rate Cuts and Job Market Insights

Market Movers: The Opening Bell

September 5, 2025

Video Transcript

Well, US markets reacting to the US jobs report from this morning.

Right now we are looking at the major stock averages higher with the Dow up by triple digits and the Nasdaq as well.

Well, Fed officials are trying to balance their mandate, keeping inflation low while supporting a strong job market.

Many inside the Fed and in the private sector worry that inflation could rise further, driven in part by Trump's new increase in import tariffs.

And when we're looking at the CMEU.

Fed watch now.

Right now we are looking at an 84% chance of a 25 basis point cut and 16% when it comes to an even higher probability of a 50% cut.

Now joining me this morning to weigh in is Sonu Varghes, vice president and global macro strategist at Carson Group.

Sonu, good morning.

Thank you so much for joining me.

Well, we have a lot to parse through when it comes to that August jobs figures.

So what do you think is the Fed's next move?

I think cutting rates, so and you see that.

You know, in markets too, right, in a way bad news is good news because rate cuts are coming and markets are surging on the back of that.

Now we've been talking about this for a while and so it's interesting that the payroll report, which everyone is expecting to come and solve came and solved, but like I said, bad news is being treated as good news.

Yeah, and so new looking ahead to the upcoming trading week, we will be getting those inflation figures, both CPI as well as PPI, and this does come ahead of the September 17th rate decision.

So how is the labor market also influencing the Fed's focus right now?

I think the Fed has a hard decision, but what's going to happen, and I chuckle because they are going to cut rates as we, you know, we just talked about it because the labor market is basically flashing a big red sign.

Anytime you have a negative payroll growth number and June payrolls are revised down from + 14,000, which is already down to negative 13,000, that is, like I said, a big flashing red sign.

Uh, as far as the labor market is concerned, so the labor market is really soft.

Uh, hiring is definitely easing, even though layoffs are low, hiring is soft enough that it's starting to push the unemployment rate higher.

The unemployment rate is the highest since October 2021.

So the Fed is just going to cut on the back of that, and the problem is that inflation is now above their target one and two, it's going the wrong direction.

So I think they have a bit of a problem there, but for now markets are looking at the data and in fact the outlook for 2026 where You know, uh, President Trump may get his people on the Fed, and we could see 6 to even 7 rate cuts over the next 16 months.

And I think that's why markets are running as fast as they are right now.

Yeah, and Sonu, as you mentioned, tariffs are beginning to significantly increase the cost of imported goods, but you mentioned tariffs, so what is your take on the uncertainty surrounding tariffs and what are the implications not just for American businesses but also consumers?

I think tariffs actually coming tying it to payrolls even.

I think the tariff impact is being seen in the cyclical sectors of the economy, right, with respect to job creation.

Remember, one person's spending is another person's income.

If more people are earning less, there's less spending in the economy.

Aggregate income growth, which is the product of hours worked, which is steady, more or less, uh, payroll growth, we know that's weak and wage growth that's on the softer side, that's running only about 2.5% annualized over the last 3 months.

Think of that as the nominal speed of the economy, right? cyclical areas tied to tariffs, manufacturing has lost about 31,000 jobs over the last three months. wholesale trade lost 32,000 jobs over the last 3 months.

Constructions also weak, lost 10,000 jobs over the last 3 months, right?

So and at the same time we are seeing durable goods inflation pick up now.

You know, several Fed governors, especially Chris Waller, I think has rightfully sort of argued that the tariff related inflation could be one off.

It could be, it may not happen all at the same time, but it is one off, and you can look past it.

But I think the Fed has a bit of a problem on their hands because services inflation is also hot.

We're starting to see services inflation, for example, the personal consumption expenditure index for services running about 3.3%.

That's way higher than it was pre-pandemic and what is.

You know, normal with respect to services inflation for the Fed to meet the inflation target.

So, but the immediate outlook, I think, is for rate cuts.

And so we have about 60 seconds here, so building on what you just said, separating facts versus feelings, that is not easy, especially when it comes to investments.

So which sectors do you see as overvalued or undervalued and what are the opportunities?

Uh, right now, uh, I, I mean, you know, if you just invested in the S&P 500, you are going to get a lot of exposure naturally to technology and technology adjacent, uh, stories, right?

Even if it's utilities, for example, so close to 50% of the index, the S&P 500 is probably index is tied to technology in some form or the other or even that AI story, right?

So we actually want to diversify further as opposed to taking a bigger bet on technology.

It's hard to figure out, OK, are these things exactly overvalued, undervalued?

We need a lot of estimates for that, but we like diversification and other sectors, whether it's industrial, financials.

They're all doing well as well, and now we've recently seen midcaps and small caps rally too.

So even, you know, just based on the rate cut environment expectations, home builders is also doing well, right?

So we're seeing a broad rally.

It's not concentrated in any one sector, and we want to take advantage of that.

OK, Sonu, always great talking to you.

Thank you so much for joining us on Jobs Friday and thank you so much for your perspective.

Thank you for having me.

“Anytime you have a negative payroll growth number… that is, like I said, a big flashing red sign.” – 02:02

Sonu Varghese, Vice President Global Macro Strategist at Carson Group, joins Remy Blaire to provide expert insights into the current economic landscape. They delve into the likelihood of the Fed cutting interest rates, with the CME FedWatch indicating an 84% chance of a 25 basis point cut. Sonu emphasizes that the recent jobs report, which shows negative payroll growth and an increasing unemployment rate—the highest since October 2021—signals a pressing need for the Fed to take action.

The conversation shifts to the impact of rising import tariffs on American businesses and consumers. Sonu explains how these tariffs are affecting cyclical sectors of the economy, leading to job losses in manufacturing, wholesale trade, and construction. He highlights the relationship between income growth and consumer spending, noting that weak payroll growth and modest wage increases are contributing to economic challenges.

As they look ahead to upcoming inflation figures, including CPI and PPI, Remy and Sonu discuss the Fed’s dilemma of managing inflation, which is currently above target, while responding to a softening labor market. Sonu points out that while tariffs may contribute to inflation, the Fed faces broader challenges with services inflation also on the rise.

In the latter part of the segment, Remy and Sonu explore investment opportunities in the current market environment. Sonu advises on the importance of diversification, especially given the heavy exposure to technology within the S&P 500. He suggests looking into sectors like industrials and financials, which are performing well, and notes the recent rally in mid and small-cap stocks, as well as homebuilders benefiting from expectations of rate cuts.

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