AFS Markets Blog: Midday 04/09/2026

• Meanwhile in markets, US Treasuries and the dollar are holding steady ahead of this afternoon’s labor market report, though punters may have other things on their minds. And I’m not just referring to the long Labor Day weekend;

• Next week we are in for the treat of the August CPI inflation release on Friday. After Fed Governor Waller’s dovish speech yesterday – which put him in direct opposition to the post-Jackson Hole hawkish stance of Chair Warsh – fed funds futures are pricing roughly a coin toss between a hike and a hold at this month’s FOMC meeting. Ultimately, today’s labor market report looks set to be little more than a footnote in the meeting. The CPI release will be the decider;

• It is fair enough that the labor market report has moved into the background, with it being expected to show continued stability. While the labor market is not firing on all cylinders, Fed Governor Waller’s satisfactory grade yesterday aptly describes the state. Consensus expects payrolls to come in at 55k, marginally below this year’s 60k average. Still, this is broadly consistent with a stable or slightly growing labor market based on most estimates of the breakeven rate. The unemployment rate is expected to hold steady at 4.1 percent, clearly down from last year’s high's at 4.5 percent;

• Nevertheless, beneath the surface-level stability lurk dark shadows that deserve closer scrutiny. One of the most ominous shadows comes from the low labor force participation rate. This measures the share of the so-called non-institutionalized population – those not in the military, prison or long-term care – aged 16 and older who are either working or actively looking for work. At 61.4 percent in July, the rate sits at its lowest level since 1976 (excluding the COVID shock) – having fallen by a full percentage point since December 2025. The recent drop in unemployment may thus reflect that people are leaving the workforce entirely rather than finding jobs;

• Does this decline simply mean people are giving up? Not necessarily, according to research from the St. Louis Fed. Three drivers are at play: statistical adjustments, an aging population and genuine behavioral shifts. First, statistical noise accounts for roughly 43 percent of the drop since December, stemming from population-control revisions by the BLS in January. Second, Baby Boomers are retiring in droves – steadily weighing down participation over time. However, retirements accounted for a relatively small share – about 16 percent – of the decline since January. While an aging population will continue to drag down the participation rate over the long run (by roughly 0.25 percentage points per year), that decline reflects a changing population and isn’t something that needs to make the alarm bells go off;

• Finally, that leaves the 41 percent drop in the participation rate driven by the choices of core working-age adults. Zooming in on prime-age workers (aged 25 to 54), the decline in the participation rate essentially took place in just one month – June – with the participation rate falling a shocking 0.6 percentage points. The sharp drop raises real concerns about the stability of the current labor market with key working-age individuals exiting the workforce in droves. However, this move should be put into perspective: the decline simply unwound the increase in prime-age participation since the summer of 2025;

• At 83.4 percent in July, prime-age participation remains broadly in line with its average level throughout the first half of 2025. That could suggest June’s drop may prove to just be a correction – if the participation rate stabilizes at this level from now on. If that is the case the decline in the participation rate – both overall and among prime-age workers – may ultimately be of little concern. We’ll be keeping a close eye on the prime-age labor force participation rate when the data drops at 14:30 CET this afternoon – and in future releases;

• Shifting to broader market commentary, the Stoxx 50 is down just under a quarter of a percent this morning, while S&P 500 futures are holding around yesterday’s close. In FX, USDJPY is up 100 pips from yesterday’s low, but – 156.50 at pixel time – remains down more than 350 pips over the past week. Moving to commodities, Brent crude has edged lower this morning but continues to hold above $95 a barrel. Notably, the average US diesel price has hit its highest level since the outbreak of the war – rising faster than crude prices due to refining bottlenecks;

• Touching on some headlines, US envoys Steve Witkoff and Jared Kushner are reportedly set to restart their pitch to get President Donald Trump his Nobel Peace Prize – I mean, work towards peace in Ukraine. They will reportedly finally head to Moscow and Kyiv over the weekend to breathe new life into the peace push that has stalled since the outbreak of the Iran war in March;

• Looking ahead, there is little on the calendar besides the Labor Market Report this afternoon. With the US off on Monday, next week is set to start slowly, with the calendar only filling up from Thursday onwards with the ECB interest rate decision – a 25bps hike – and the US PPI and CPI releases.

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