Kick the can — Last week’s nonfarm payroll report suggested a continued cooldown in the labor market, which is very normal for mature expansions. The Bureau of Labor Statistics reported 177,000 job gains in April but revised the March figure down from 228,000 to 185,000 (Figure 1).
Some economists were expecting a weak number for job gains: The data collection period coincided with the immediate aftermath and volatility from Liberation Day. For context, the household and establishment surveys are conducted around the 12th day of the month—just a week or so after the tariff announcements and subsequent spike in market volatility, which peaked on April 8 (Figure 2).
Instead, the unemployment rate was mostly steady at 4.2% and worker earnings slowed marginally, down 0.2% on both an hourly and weekly basis. Overtime hours, manufacturing hours, and temporary help— which are somewhat leading indicators of short-term demand for labor—were mostly flat. Overall, the report was decent and should give further credence to Federal Reserve officials, who have indicated that there is no reason to rush to cut interest rates.
There is also a growing split between the market and Fed posturing. The federal funds rate futures market is pricing in nearly four cuts of 25 basis points (bps) by January 2026. But Fedspeak and the strength of the recent payrolls report seem to indicate something less than 100 bps of cuts. On April 24, for example, Fed Governor Christopher Waller said: “It wouldn’t surprise me that you might start seeing more layoffs, a tick up in the unemployment rate going forward if the big tariffs in particular come back on…I would expect more rate cuts, and sooner, once I started seeing some serious deterioration in the labor market.”
Cleveland Fed President Beth Hammack also chimed in after ruling out a May rate cut: “If we have clear and convincing data by June, then I think you’ll see the committee move.” In both instances, the catalyst for a cut is a deteriorating labor market. However, given last week’s show of relative employment strength, rate-cut hopefuls still face an uphill climb.
Meanwhile, Fed officials stepped back from describing pricing pressures associated with tariffs as transitory, after the breadth and magnitude of U.S. and retaliatory duties were announced. Indeed, U.S. economists surveyed by Bloomberg last week anticipate enough price disruption from tariffs to keep the Fed sidelined until September, rather than cutting 25 bps in June, as federal funds rate futures projected before Friday’s jobs report (such odds slipped to a July cut following the report).
From a fundamentals’ perspective, the 30,000-foot view appears to be that of a “muddle-through” economy. The Fed’s Beige Book, released most recently in late April and focused on anecdotal evidence about economic conditions across the country, noted: “Economic activity was little changed since the previous report, but uncertainty around international trade policy was pervasive across reports.” In short, while uncertainty is abundant, nothing has broken from an economic perspective. It will therefore likely take some time before any new policies have a significant effect. For now, we are still at the mercy of either a slowly aging economic expansion or a nascent recession.
FROM THE DESK
Agency CMBS — There were no major changes to our market, week over week. Fannie Mae origination was elevated at $1.26 billion, above the YTD weekly average of ~$900 million. The volume swell was easily explained by chunky $350 million and $212 million 5/4.5 FTIO deals in the market last week—both traded well. Fannie spreads were one to three bps tighter. Ginnie Maes were two to three bps wider on the week, but no material changes otherwise. No volatility here is a good thing, for now.
Municipals — AAA tax-exempt yields were lower throughout the yield curve, week over week. The municipal bond market continued to heal: New issuance deals that were on day-to-day status came to market to price. While April was volatile at the start, the municipal market saw a calmer tone the last two weeks. This helped bring a total of $45 billion new issues, which was up approximately 2% from a year earlier (YTD issuance in 2025 is up 11% over 2024). Municipal bond funds had their first weekly inflow since early March, with $1.56 billion arriving (YTD inflows of $1.69 billion). The high-yield fund subsector had inflows of $234 million last week.
