Labor Quake
August 3, 2025 – Weekly Comment
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FOMC 30-July: no ease, Powell says labor market is solid
Next day, Trump calls Powell TOTAL LOSER
Friday: NFP just 73k, with a massive revision of the previous month from 147k to 14k
Trump fires head of the BLS
Fed Governor Kugler resigns/ FOMC dissension to grow/who would want Fed Chair job?
Trump sends nuclear subs off Russia coast.
According to WSJ, NY Fed President Williams indicated he is open to considering a rate cut before the Sept FOMC
Post on Linked In from friend Christopher Long:
More on Payrolls:
Besides the massive revisions to May and June, here’s another interesting stat: from January though June, the total of the first print on payrolls was 985,000. Fully revised that number is now 524,000, 47% less than initially reported.
So here’s a question for all: if the Fed had had the previous 2 months payrolls as they stand now, showing only 19,000 and 14,000 increases, would they have cut this week? I think the odds priced in the market would have been over 50%, pushing them to cut.
Headline leading Sunday’s WSJ: Unemployed Americans Endure Longer Job Searches in a Cooling Market.
From my note last week:
My belief is that labor indicators might deteriorate quickly (NFP on Aug 1 and then Sept 5). Jackson Hole is August 21-23.
…I think by Jackson Hole the market will be pricing a 50/50 chance between a cut of 25 and 50 at the Sept meeting (worth around 35 bps), with some odds of another 25 in October (worth 7-10). I think final Sept expiry could be 9607 to 9612. [Friday 8/1, SFRU5 9593.5s]
Technical patterns in equity futures are not good. On Sunday 7/27, an EU trade deal was announced. New contract highs in ESU5 and NQU5 on Sunday night, but ESU5 failed, and closed lower than Friday (NQ didn’t). Then META and MSFT earnings sparked new contract highs (again) late Wednesday into Thursday. But Thursday ended in key reversals: new contract highs, outside ranges, lower closes both ES and NQ. Not always a valid sell signal, but certainly a red flag. Friday’s sell off associated with the employment report created an outside WEEK. Recent examples in ES of new contract highs, outside week, and lower close: week ending 7/19/24. 7/19 close 5553.75. By 8/5 the close was 6% lower at 5217.50. Just before that: week ending 4/5/24, the close was 5253.0. Settle on 4/19 was 4.7% lower at 5003.75.
The Fed doesn’t cut when things are good. They cut when things are bad. As mentioned previously, in Sept 2007 when the Fed kicked off an easing cycle with an initial 50 bp whack, stocks initially embraced it and ran to new all-time highs in October. Then it all came tumbling down.
What’s the tell? Maybe it’s going to be credit spreads. HYG and JNK both gapped opened lower on Friday but held July’s lows. Below is a chart showing VIX in green and Hi-Yld 5y CDS spread in white. Perhaps not particularly informative, but both have turned up. A 50% retrace of April’s spike doesn’t seem to be an unreasonable target (around 390 bps in the spread from current 336).
Friday featured a huge rally in front-end SOFR contracts. Leading the charge was SFRH6, +31.5 bps to 9649.5 (right around 3.5% vs current Fed Eff 4.33%). The market delivered the ease that the Fed didn’t. SFRU5 settled +17 at 9593.5 which is 26.5 lower in yield than EFFR. FFV5 settled 9589 (+11.5), near certainty of an ease at the September FOMC. Worth noting is that the 30y bond yield only fell 8.2 bps on the week to 4.806%. Trump’s assumption that mortgage rates will come down with official cuts in the FF target is woefully naïve.
Near SOFR calendar spreads exploded higher as the market instantly pushed forward the easing schedule…for now. Surprisingly the peak SOFR slot is still the 7th quarterly, SFRH7 at 9697.5. Another day like Friday and the peak contract will move forward on the strip.
Given that the official end of Powell’s term is May, there has been focus on SFRH6/U6 calendar, with the idea that large cuts might occur directly with a new Fed Chair. Now, timing has been thrown into question. SFRH6/U6 settled -39 (9649.6/9688.5). This was +4.5 on the day. Like other SOFR calendars it’s been in a solid downtrend. On January 14 the spread was +6 (hi of year). Low for the year was Thursday at -43.5. While near spreads will remain inverted, there will necessarily be some shifts as the market reassesses timing and magnitude of eases. However, deferred spreads from reds back will likely steepen. As an example, SFRZ6/Z7 settled +13.0 on Friday (9696/9683) which was +8 on the day. Thursday was low settle for the year at +5.0.
Economic data is light this week. ISM Services on Tuesday.
Fed speakers usually appear right after the FOMC and this week that could be of interest. Cook and Collins participate in panel event Wednesday, and Daly speaks that afternoon. Bostic on Thursday. Musalem on Friday.
Auctions:
Tuesday $58b 3yr
Wednesday $42b 10y
Thursday $25b 30y
altogether raising $35.2 billion in new cash. Note the TGA is only $370 billion, and to get that back to a reasonable level of $800 billion represents a general liquidity drain.
OTHER THOUGHTS/ TRADES
There have recently been a decent amount of 50k or larger option trades, I will just highlight a few.
Last Friday there was a buyer of 50k TYU5 113.0c for 8 covered 110-26. On Friday these calls settled 19, +13 on the day vs 112-06+. New buyer of 23k TYU5 112.5c for 15 on Tuesday settled 29 on Friday, +20 on the day. Treasury vol was bid at the end of the week, though not severely. On the week MOVE just 83.83 from previous Friday 82.09.
Early last week a buyer of 60k SFRV5 9618.75/9643.75cs for 4.5. On Thursday this spread was around 3, but settled 9.25 on Friday (17.75/8.5 vs SFRZ5 9626.0). Buyer of 75k SFRQ5 9700c for 0.25 got no satisfaction from Friday’s settle at the same price (0.25), but I would bet the shorts are a little less comfortable.
Friday buyer of 50k each 0QZ5 9787.5/9800cs for 1.0 and 0QZ 9837.5/9850cs for 0.5. If looking for big dislocations, it’s better to just be long an outright call rather than a tight call spread, but interesting in any case.
| 7/25/2025 | 8/1/2025 | chg | ||
| UST 2Y | 390.5 | 369.8 | -20.7 | |
| UST 5Y | 396.6 | 376.9 | -19.7 | |
| UST 10Y | 438.4 | 421.8 | -16.6 | wi 423.0 |
| UST 30Y | 492.7 | 480.6 | -12.1 | wi 480.2 |
| GERM 2Y | 194.5 | 192.5 | -2.0 | |
| GERM 10Y | 271.6 | 267.7 | -3.9 | |
| JPN 20Y | 255.8 | 255.4 | -0.4 | |
| CHINA 10Y | 173.2 | 170.2 | -3.0 | |
| SOFR U5/U6 | -83.5 | -85.0 | -1.5 | |
| SOFR U6/U7 | -4.0 | -11.0 | -7.0 | |
| SOFR U7/U8 | 21.5 | 19.5 | -2.0 | |
| EUR | 117.43 | 115.89 | -1.54 | |
| CRUDE (CLU5) | 65.16 | 67.33 | 2.17 | |
| SPX | 6388.64 | 6238.01 | -150.63 | -2.4% |
| VIX | 14.93 | 20.38 | 5.45 | |
| MOVE | 82.09 | 83.83 | 1.74 | |
