MUFG's George Goncalves argues US jobs must worsen before the Fed cuts rates again. Analysis of alternative data and the shutdown's impact on monetary policy.
The Paradox of the Fed: Why a Weak Jobs Market is the Key to Rate Cuts
By: Carlos Santos
The current state of the US economy presents investors with a central paradox: a resilient market facing the grim necessity of an economic slowdown. The Federal Reserve's dilemma is one of balance—taming inflation without plunging the labor market into a painful recession. It is within this critical tension that I, Carlos Santos, offer this detailed perspective, focusing on the insightful analysis provided by George Goncalves, Head of US Macro Strategy at MUFG.
Mr. Goncalves's commentary, featured on Bloomberg Surveillance, cuts through the market noise with stark clarity: the US jobs market must, and likely will, worsen before it truly improves. His core argument is simple yet powerful: the current, slightly weaker economic data—especially the limited, alternative figures available after the recent government shutdown—provides the necessary justification for the central bank to continue its path of rate cuts. This perspective suggests that market participants should not fear signs of labor softness, but rather embrace them as prerequisites for a more accommodative monetary policy that may prevent a more severe downturn. Understanding this dynamic is crucial for any investor positioning their portfolio today.
Deciphering the Labor Market’s Necessary Evil
🔍 Zoom in on Reality
The current economic reality is defined by a delicate dance between the market’s desire for lower rates and the Federal Reserve’s mandate to maintain maximum employment. George Goncalves’s thesis—that the jobs market needs to deteriorate before it can strengthen—is fundamentally an argument about the Fed’s reaction function. The central bank has spent considerable time communicating that its decisions are data-dependent. However, Mr. Goncalves posits that the bar for stopping the recent cutting cycle is extremely high. He suggests that the Fed requires "really strong jobs data to turn off" its easing bias. In the absence of such compelling strength, any indication of weakness is interpreted as ammunition for further rate cuts.
This perspective gains significant weight when considering the context of the recent government shutdown. The official release of comprehensive, high-quality labor data, such as Non-Farm Payrolls and JOLTS, was either delayed, compromised, or replaced by less complete metrics. The reality is that the Fed, despite its stated commitment to data, was forced to rely on limited, alternative economic data. According to Goncalves, this fragmented information still points toward a weaker labor market. This is the key reality: the perceived weakness, even if based on partial data, is sufficient to confirm the Fed's bias toward easing. The job market is not collapsing, but it is exhibiting the kind of softness—subtle declines in job openings, a gradual rise in unemployment claims, or moderate wage growth deceleration—that supports the narrative of a cooling economy. This necessary cooling, while painful for those directly affected by job losses, is viewed by Goncalves as a prerequisite for lower borrowing costs, which ultimately prevents the economy from stalling completely. Therefore, the reality is that bad news for the labor market is becoming good news for the rate-cut outlook.
The implications for the wider economy are substantial. A controlled softening of the labor market can reduce wage inflation pressures without triggering a full-scale recession. If the Fed can achieve this delicate balance, it validates their decision to start easing. The alternative—a persistently tight labor market—would force the Fed to maintain high rates for longer, dramatically increasing the risk of a much sharper, less controlled economic contraction. Goncalves is essentially arguing that the current trajectory is one of necessary sacrifice to achieve a soft landing, where employment weakness precedes a return to sustained, healthy growth supported by lower interest rates. Investors must align their thinking with this critical distinction: temporary weakness is a sign that the strategy is working.
📊 The Numeric Panorama
While the recent government shutdown severely restricted the availability of gold-standard economic data, the numeric panorama still reveals a trend that validates Goncalves’s concerns about labor market softening. When we discuss alternative economic data, we are referring to a collection of high-frequency indicators that become crucial when official Bureau of Labor Statistics (BLS) figures are unavailable. These include:
Initial Jobless Claims: Often published by state labor departments or captured by private firms, this metric tracks new filings for unemployment insurance. An upward trend, even if slight, signals rising caution among employers. While a single-week increase is noise, a sustained multi-week rise is a strong leading indicator of weaker Non-Farm Payrolls (NFP) ahead.
Alternative Payroll Data: Private payroll processors (like ADP) and data firms often release monthly employment change figures. These, while not as comprehensive as NFP, can serve as a proxy. A trend showing deceleration in monthly job additions supports the weak labor market narrative.
Small Business Optimism Surveys (NFIB): Components of these surveys that track hiring plans and compensation expectations often show businesses moving into a defensive posture. A drop in the percentage of firms planning to hire new workers is a clear numeric indicator of cooling demand for labor.
Consider a hypothetical scenario reflecting the current sentiment: The unemployment rate, which had stabilized near 3.8%, may have ticked up slightly, perhaps to 3.9% or 4.0%. More importantly, average hourly earnings growth might be decelerating from an annualized pace of 4.5% toward 4.0%. These are the incremental, yet significant, numeric shifts that Goncalves and his team at MUFG focus on. The absence of an official NFP print showing, say, 300,000+ jobs added—the kind of "really strong jobs data" that Goncalves says would "turn off" the Fed—means that the default bias shifts to the easing path.
The numeric reality is that the market is now pricing in an increasing probability of at least one, and possibly two, additional rate cuts in the short term. This expectation is directly proportional to the perceived weakness in the labor market. The 10-year Treasury yield, a key measure of market sentiment, often reacts by moving lower when such labor softness is confirmed, showing that the bond market is essentially betting on the Fed’s reaction to a numeric downturn in employment figures.
💬 What They Are Saying
George Goncalves’s perspective, disseminated through platforms like Bloomberg Surveillance, is a critical counter-narrative to the prevailing hawkish sentiment expressed by some Federal Reserve members. The statement that the labor market needs to "get worse before it gets better" encapsulates a painful but necessary acceptance of the economic cycle. Goncalves, as a Head of US Macro Strategy at MUFG, speaks with the authority of the fixed-income market, a sphere where the anticipation of Fed moves is paramount.
His primary message is directed squarely at the Fed's communication strategy. By stating that the central bank requires "really strong jobs data to turn off" its rate-cutting bias, he is challenging the idea that simply achieving the 2% inflation target is sufficient to stop easing. For Goncalves, the employment half of the Fed's dual mandate is now the dominant driver. The central bank has arguably declared victory over inflation, but the labor market weakness—especially when seen through the lens of limited alternative data during the shutdown—provides the justification for the next phase of policy action.
This view stands in contrast to hawkish members of the Federal Open Market Committee (FOMC), such as Kansas City Fed President Schmid (as seen in recent market context), who may argue that inflation remains "too hot" and that the labor market is merely "normalizing" from unsustainable highs. Goncalves's response is that the marginal deterioration is not just normalization; it is a sufficient condition for a cut. He is essentially positioning the fixed-income market to expect that the downside risks to growth outweigh the upside risks to inflation in the eyes of the majority of the FOMC.
The phrase that the limited, alternative economic data "still points to the US having a weaker labor market" is a potent observation about data integrity and policy-making under duress. It acknowledges the lack of comprehensive BLS reports due to the government shutdown but asserts that even the fragmented evidence—from private surveys to weekly unemployment claims—is painting a consistent picture of cooling. This consensus among alternative data sources strengthens the argument for a rate cut, positioning Goncalves as a leading voice for the dovish camp that believes the Fed is close to delivering.
🧭 Possible Pathways
Based on George Goncalves's analysis, the market's future trajectory splits into a few distinct pathways, each carrying different implications for investors. Understanding these scenarios is key to strategic positioning in a time of compromised data.
Pathway 1: The Goncalves Scenario (Base Case - High Probability)
The labor market continues its slow, controlled deterioration, with unemployment claims ticking up and wage growth decelerating toward a sustainable 3.5%. The alternative data, validated by eventually released official figures, confirms a weaker labor market.
Investment Implication: The Fed cuts rates again, perhaps earlier than consensus expects, to prevent a hard landing. Bond yields move lower, particularly on the short end, and rate-sensitive equities (Housing, Technology) perform well. Defensives like healthcare and utilities provide stability.
Pathway 2: The Hawkish Standoff (Medium Probability)
The Fed, influenced by the remaining hawkish minority, decides to pause its rate-cutting cycle, arguing that the labor market weakness is merely a return to pre-pandemic norms and that core inflation risks remain elevated. They might dismiss the alternative data as too unreliable.
Investment Implication: Treasury yields snap back higher (sell-off in bonds), and the US dollar strengthens. Equities, facing a renewed fear of a "higher for longer" rate environment, experience a significant pullback, especially highly-leveraged companies.
Pathway 3: The Data Surprise (Low Probability)
Once the official data from the BLS is released following the shutdown, it reveals a surprisingly strong labor market, with high NFP figures and resilient wage growth. Goncalves's reliance on alternative data is proven incorrect.
Investment Implication: This is the nightmare scenario for those positioned for cuts. Market expectations for easing are decimated, causing a sharp spike in yields and significant volatility in all risk assets. The Fed is "turned off" from cutting, and the risk of a true hard landing in 2026 increases as the economy has absorbed less slack than assumed.
Goncalves's analysis champions Pathway 1, positioning investors to be prepared for the pain in the jobs market as a necessary condition for a policy pivot. The strategic path for a prudent investor is to hedge against Pathway 2 (hawkish pause) by maintaining some exposure to high-quality, cash-rich companies that can withstand high-rate environments, while allocating capital to the duration trade (long-term bonds) to benefit from the high-probability rate cut identified by Goncalves.
🧠 Food for Thought…
The government shutdown and its subsequent "data blackout" introduce a deep philosophical question for central banking: Can the Federal Reserve truly remain data-dependent when the most critical data is compromised? Goncalves's view—that limited, alternative data is enough to justify a cut—forces us to consider the quality and integrity of the information driving trillion-dollar policy decisions.
For thought, we must ponder the power of the narrative over the metric. When official figures are missing, the void is filled by interpretation, sentiment, and the selective use of second-tier data. If the Fed cuts rates based on a mosaic of weaker, alternative indicators, does it risk appearing to be more market-dependent or politically-influenced than data-dependent? The risk is that the market will interpret the move as the Fed caving to pressure to prevent a deep recession, rather than a dispassionate response to concrete, established economic facts.
Furthermore, we must distinguish between cyclical and structural labor market weakness. Is the slowdown in hiring a temporary cyclical adjustment driven by the high cost of capital (which a rate cut can fix), or is it a structural issue, such as labor displacement due to technology and AI, or a demographic shift (which a rate cut cannot fix)? If the weakness is structural, cutting rates only risks reigniting inflationary pressure without solving the underlying employment problem. Goncalves hints at the cyclical nature—the jobs market will "get worse before it gets better"—implying the issue is a function of restrictive policy that needs to be eased.
The critical insight here is that the Fed, facing a loss of clear vision due to the shutdown, is forced into a precautionary stance. It is easier to cut rates based on perceived weakness and then reverse course if the economy strengthens, than it is to hold rates high until a catastrophic data point confirms a hard landing. This precautionary principle, driven by an informational void, is the real food for thought: the Fed is prioritizing the prevention of a hard landing over the meticulous adherence to its data-dependent mandate.
📚 Starting Point
For the investor navigating this environment, the starting point for strategy must be the rigorous analysis of the indicators that Goncalves and his peers at MUFG are scrutinizing—namely, the alternative economic data. When the primary source (BLS) is unreliable or delayed due to events like a government shutdown, discipline demands shifting focus to leading and high-frequency indicators.
The first starting point is to track the Purchasing Managers' Index (PMI) for both manufacturing and services. The PMI surveys business executives about current and future economic conditions, including employment intentions. A PMI reading consistently below 50 signals contraction and is a powerful leading indicator of labor market weakness and reduced demand. If the services PMI, which represents the largest share of US jobs, begins to fall sharply, it will significantly boost the probability of the Fed cuts that Goncalves predicts.
The second starting point is to monitor the nuances within the weekly Initial Jobless Claims. Don't just look at the headline number. Investors should look for a sustained rise in the four-week moving average, as this smooths out weekly volatility and provides a clearer signal of a structural shift in the labor market. A rise above a certain threshold (historically around 300,000 for a significant signal) would confirm the "worse before it gets better" thesis.
The third crucial starting point is the Bond Market. The deepest conviction in Goncalves’s thesis is reflected in the bond yields. The movement in the 2-year Treasury yield is the most sensitive barometer of short-term Fed policy expectations. When the 2-year yield drops, it signals that the market is firmly pricing in an impending rate cut. If you see the 2-year yield moving significantly lower, it’s a strong indication that the market is agreeing with MUFG’s assessment of a weak labor market justifying the next cut. By focusing on these high-quality, available indicators, investors can build a resilient strategy that minimizes reliance on the compromised official data while anticipating the Fed's next move.
📦 Informative Box 📚 Did you Know?
The Government Shutdown and the Data Integrity Crisis
Did you know that the recent US government shutdown did more than just send federal employees home? It created a temporary, yet profound, data integrity crisis that directly impacts the Federal Reserve's ability to set monetary policy. This is precisely the issue Goncalves highlights when he mentions the reliance on "limited, alternative economic data."
What Data Was Compromised?
The shutdown halts the operations of key statistical agencies. The most vital data sets affected include:
Non-Farm Payrolls (NFP): Released by the Bureau of Labor Statistics (BLS). This is the single most important gauge of the labor market. Its delay or non-release creates a massive information vacuum.
Consumer Price Index (CPI) / Producer Price Index (PPI): Released by the BLS. These are the primary inflation gauges. Without them, the Fed is flying blind on a core part of its mandate.
Gross Domestic Product (GDP): Released by the Bureau of Economic Analysis (BEA). This comprehensive measure of economic health is critical for long-term policy formulation.
The Policy Conundrum
The Fed is explicitly mandated to manage monetary policy based on maximum employment and price stability. When the data that measures these two factors is unavailable, the Fed faces an ethical and practical dilemma. It cannot delay policy decisions indefinitely.
As Goncalves observes, this vacuum forces the Fed to rely on alternative data. This could include private payroll surveys (like ADP), proprietary credit card spending data, and public mobility data. While these indicators are useful, they lack the methodological rigor, sample size, and comprehensive coverage of official government statistics. The risk is that the policy decision (like a rate cut) is based on a potentially noisy or biased signal. The fact that Goncalves is confident that even this alternative data points to a weak labor market underscores the severity of the underlying economic cooling, suggesting the weakness is pervasive enough to be captured by even these compromised signals.
🗺️ Where From Here?
The path forward hinges on the timing and conviction of the Federal Reserve’s next move, a decision that Goncalves has tied directly to the weakening labor market. The immediate future will see the market grapple with two critical phases: the re-establishment of data integrity and the next FOMC meeting.
The first major milestone will be the re-release of the official economic data that was delayed by the government shutdown. These figures—the delayed NFP, CPI, and GDP reports—will either confirm or contradict the weaker signals seen in the alternative data. If they confirm the weakness, Goncalves’s prediction gains overwhelming validation, and the market will aggressively price in a rate cut at the earliest opportunity. Conversely, if the official data is surprisingly strong, a period of extreme volatility and a reassessment of the MUFG thesis will occur.
However, the longer-term trajectory, favored by Goncalves, is a continuation of the easing cycle. He anticipates that the underlying labor market cooling is structural enough that the Fed will eventually have to cut rates again. This is driven by the fact that the cost of waiting too long and allowing the economy to slip into a deep recession is far greater than the risk of cutting slightly too early. The consensus, based on his view, is that the next cut is likely to be pulled forward from 2026 into the first quarter of the coming year.
The consequence for financial markets will be a steepening of the yield curve—long-term bond yields rising faster than short-term yields—as investors price in economic recovery after the Fed has finished cutting rates. Equity markets, particularly those sectors benefiting from lower borrowing costs and a stronger consumer (e.g., housing, autos, consumer discretionary), will likely see their risk premia reduced. The message from Goncalves is clear: the path from here is through the valley of labor weakness toward the summit of monetary easing and eventual recovery.
🌐 It’s on the Net, It’s Online
"The people post, we think. It’s on the net, it’s online!"
The online reaction to George Goncalves’s call—that the jobs market needs to "get worse before it gets better"—is a fascinating study in market psychology. On platforms like X (formerly Twitter) and Reddit's finance forums, the sentiment is a volatile mix of panic, cynicism, and opportunism.
The online community, often driven by emotional trading, reacts poorly to any prediction of deterioration. Hashtags trending online focus on recession fears, often simplifying Goncalves's nuanced thesis into a panic-inducing headline. The people post fear, worrying about immediate portfolio losses and a looming crisis. They are focused on the "worse" part of the prediction.
What we think, however, is that this reaction misses the constructive aspect of the analysis. Goncalves is not predicting a crisis; he is stating a necessary condition for a policy solution. The online community is focusing on the consequence for employment, while the sophisticated investor is focusing on the consequence for interest rates. The online chatter, rife with speculation, creates a valuable indicator of market emotion—extreme pessimism, which often correlates with a market low, presents a classic opportunity for the contrarian investor.
A second online trend is the proliferation of "alternative data" theories. The government shutdown has made every amateur analyst a data scientist, pushing out their own high-frequency charts and proprietary trackers. The online world is attempting to solve the data void created by the shutdown. This trend validates Goncalves’s strategy of looking beyond official sources. The lesson here is to use the online sphere to understand what data is being tracked (job postings on LinkedIn, company layoff announcements) but to apply the rigorous analysis of Goncalves to interpret whether that data justifies a cut, rather than being swayed by the online noise.
🔗 Anchor of Knowledge
Successfully navigating an environment where the most crucial economic data is compromised and the global monetary policy is in flux requires a robust framework for assessing market risk and opportunity across international markets.
To further deepen your expertise in capital allocation strategies, particularly focusing on how global macro signals translate into volatility and opportunity in other key indices,
Final Reflection
George Goncalves’s commentary is a stark reminder that in the world of macroeconomics, bad news for one sector can be a necessary precursor for good news in the broader economy. His thesis—that a weaker labor market is the essential justification the Fed needs for its next rate cut—reframes the current environment from one of fear to one of strategic expectation.
The challenge for the investor is one of discipline: to look past the sensationalism of a jobs slowdown and recognize it as the final, painful step required to secure a soft landing. We are in a period where policy is not driven by the spectacular, but by the subtle, yet consistent, signs of cooling captured even by alternative data. The inspiration lies in knowing that this necessary sacrifice in employment today is the path to lower interest rates and renewed, sustainable growth tomorrow. Remain critical, stay informed, and trust that the policy engine, though slow, is pointed in the right direction.
Featured Resources and Sources/Bibliography
Bloomberg Surveillance: Platform for George Goncalves's commentary.
URL Reference:
Bloomberg Television YouTube Channel
MUFG Americas: Official source for George Goncalves's macro strategy research.
URL Reference:
MUFG U.S. Macro Strategy
Federal Reserve (Fed) / FOMC: Source of monetary policy decisions and member speeches (e.g., Schmid).
National Federation of Independent Business (NFIB): Source for small business optimism and hiring intentions data (alternative data).
⚖️ Disclaimer Editorial
This article reflects a critical and opinionated analysis produced for Diário do Carlos Santos, based on public information, news reports, and data from confidential sources. It does not represent an official communication or institutional position of any other companies or entities mentioned here.
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