Rising Yields Test Borrowers as Labor and Productivity Data Hold Steady

Matthew Rubin Chief Investment Officer

 

1. Treasury yields climbed last week, pushing mortgage and auto borrowing costs higher and raising market expectations for a Federal Reserve rate increase.
2. Initial jobless claims edged up to 206,000 while layoffs stayed limited, pointing to a labor market that is cooling gradually rather than deteriorating.
3. Second-quarter productivity held at a 1.4% annual rate and unit labor costs were revised lower, an encouraging combination for the inflation outlook.

 

1. Jobless Claims Hold Near Low Levels as Layoffs Stay Limited

Treasury yields moved higher last week as investors reassessed the outlook for inflation and interest rates, and the effect extends well beyond the bond market.¹ Lenders use Treasury yields as the benchmark for setting rates on mortgages, automobile loans, and corporate debt, which means an increase gradually raises borrowing costs across the economy.

Housing absorbs the effect most directly, and the 30-year fixed mortgage rate averaged about 6.7% last week, well above the level briefly reached in February, when rates dipped under 6% and raised expectations for a rebound in home sales.² Those expectations faded as borrowing conditions tightened through the spring and summer.

Car buyers face similar pressure, because auto loans track medium-term yields, and the five-year Treasury yield has climbed to its highest level since January 2025.¹

Driving the move in yields is inflation, which continues to run above the Federal Reserve’s (Fed’s) 2% target. The Fed’s preferred price measure rose 3.7% through July,³ and futures markets now imply roughly a 50% probability of a rate increase at the September meeting.⁴

2. Jobless Claims Edge Higher While Layoffs Stay Limited

The labor market showed little change last week. Initial claims for unemployment benefits rose to 206,000, a modest increase from the prior week. Continuing claims, which count people still receiving benefits, totaled about 1.78 million.⁵

Both figures remain low by historical standards. Readings at this level suggest that employers are holding on to the workers they have, even as the pace of new hiring has slowed from earlier in the year. Layoff activity has stayed limited, and that has helped keep the unemployment rate relatively stable.

The weekly claims series is volatile, so the trend matters more than any single reading. The four-week average has hovered near 207,000, a range consistent with steady conditions rather than deterioration.⁵

We read the data as evidence of a labor market that is cooling gradually rather than cracking. Employment income continues to support household spending, which remains the largest driver of economic activity. The August employment report, released Friday, offered a more full picture of hiring and wage growth. Nonfarm payrolls rose by 162,000 in August, well above consensus estimates, while the unemployment rate held steady at 4.1%.⁷

3. Productivity Holds Firm as Labor Cost Growth Cools

Productivity data released last week offered encouraging news on the inflation outlook. Output per hour in the nonfarm business sector rose at a 1.4% annual rate in the second quarter, unchanged from the preliminary estimate, and an improvement from the 0.8% pace set in the first quarter.⁶

Hourly compensation increased 2.6% from a year earlier, supporting household income, which in turn sustains consumer spending and broader economic activity. Unit labor costs, which measure pay after adjusting for productivity gains, were revised lower to a 1.2% annual increase.⁶

The relationship between these figures is important. When workers produce more in each hour, employers can raise pay without raising prices to the same degree. Steady productivity growth and moderate labor cost increases give businesses room to absorb wage gains.

Should these conditions persist, they would relieve one source of pressure on consumer prices, a welcome development amid stubborn inflation.

Looking Ahead

1. Initial Jobless Claims – Thursday, September 10^th
2. Producer Price Index – Thursday, September 10^th
3. Consumer Price Index – Friday, September 11^th

Why It Matters

Thursday brings two readings that speak directly to the themes above. First is the weekly jobless claims report, which will show whether the modest uptick in filings was noise or the start of a firmer trend. Second is the August producer price report, which measures changes in wholesale costs before they reach store shelves and offers an early read on recent pipeline pressures. Friday brings the August consumer price report, the week’s most consequential release, because it will shape expectations for the Federal Reserve meeting later in the month and, by extension, the path of Treasury yields that set mortgage and auto borrowing costs. Together, the three releases will tell us whether last week’s picture of a steady labor market and moderating cost growth has carried into September.

For the period ending 9/4/26.
*Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, September 2026
² Freddie Mac, Primary Mortgage Market Survey, September 3, 2026
³ U.S. Bureau of Economic Analysis, Personal Income and Outlays, July 2026
⁴ CME Group, FedWatch Tool, accessed September 3, 2026
⁵ U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Weekly Claims News Release, September 3, 2026
⁶ U.S. Bureau of Labor Statistics, Productivity and Costs Second Quarter 2026 Revised, September 3, 2026
⁷ U.S. Bureau of Labor Statistics, U.S. Department of Labor, The Employment Situation — August 2026, released September 4, 2026

Disclosures

Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
These materials are furnished for informational and illustrative purposes only, to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. Materials have been compiled from sources believed to be reliable; however, Cary Street Partners does not guarantee the accuracy or completeness of the information presented. Such information is not intended to be complete or to constitute all the information necessary to evaluate adequately the consequences of investing in any securities, financial instruments, or strategies described herein.
Cary Street Partners and its affiliates are broker-dealers and registered investment advisers and do not provide tax or legal advice; no one should act upon any tax or legal information contained herein without consulting a tax professional or an attorney.
We undertake no duty or obligation to publicly update or revise the information contained in these materials. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
Nothing contained herein should be considered a solicitation to purchase or sell any specific securities or investment-related services. It should not be assumed that any of the securities transactions or holdings discussed were, or will prove to be, profitable.
The Personal Consumption Expenditures (PCE) Price Index measures the change over time in prices paid by U.S. consumers for goods and services. Published monthly by the Bureau of Economic Analysis (BEA), it is the Federal Reserve’s preferred measure of inflation and is used to assess progress toward the Fed’s 2% inflation target. The PCE Price Index differs from the Consumer Price Index (CPI) in its scope, weighting methodology, and treatment of certain healthcare expenditures; it generally registers a slightly lower inflation rate than CPI.
The Core Personal Consumption Expenditures (PCE) Price Index measures inflation in consumer spending after excluding food and energy prices, which tend to be more volatile. Published monthly by the Bureau of Economic Analysis (BEA) alongside the headline PCE, Core PCE is closely monitored by the Federal Reserve as a signal of underlying, persistent inflation trends. Because it strips out short-term price fluctuations in commodities and fuel, it is considered a more stable indicator of the direction of inflation over time.
The PCE Price Index family includes both the headline Personal Consumption Expenditures Price Index and the Core PCE Price Index, published monthly by the Bureau of Economic Analysis (BEA). The headline index captures price changes across all goods and services consumed by U.S. households; the core variant excludes food and energy to isolate underlying inflation trends. Together, these measures serve as the Federal Reserve’s primary inflation benchmarks in evaluating monetary policy, including decisions regarding the federal funds rate target.
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 2000® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX).
CSP2026001_36