Now that's a reality check

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Well, well, well. In a week jam-packed with global tariff, earnings, data and policy fireworks, the most explosive was kept for last - July's U.S. employment report, which shattered the optimism - or complacency - building around the U.S. economy and stock market. 

Weak job growth, together with the latest wave of steep tariffs imposed by U.S. President Donald Trump, triggered a huge selloff in global stocks and the dollar on Friday, floored bond yields, and revived expectations of a Fed rate cut next month. 

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Global markets were floored on Friday by a powerful one-two punch from the latest U.S. employment data and U.S. tariffs slapped on dozens of countries. It was a sobering reminder that the economic foundations supporting Wall Street's record highs this week may not be that strong.

The weak jobs growth seemed to fly in the face of Fed Chair Jerome Powell's assessment on Wednesday that the labor market is strong, and vindicate the two dissenters, Governors Christopher Waller and Michelle Bowman. Although to be fair to Powell, he did stress that downside risks were growing. 

Yet average earnings and hours worked rose in July, and the unemployment rate only inched up to 4.2%. That's effectively still full employment. If the bar to cutting rates is tied to the unemployment rate, it is still a high one. 

Rates futures traders don't see it that way though. They now see a rate cut next month as a near certainty, and are pricing in 60 basis points of easing by year end. 

Investors were also sideswiped on Friday by U.S. President Donald Trump's latest wave of tariffs on 69 trading partners, ranging from 10% to 41%, that will start in a week's time. This will raise the U.S. effective tariff rate closer to 20%, nearly 10 times higher than the end of last year.

Of course, bilateral trade deals could be struck and these levies may be lowered, but it is a reminder that the growth and inflation outlook is challenging at best. With equity prices and optimism around Big Tech at such lofty levels, the correction when it came was always likely to be big. 

If that wasn't enough for investors to digest, Trump announced late on Friday he is firing the commissioner of the Labor Department's Bureau of Labor Statistics following the latest jobs data, and Fed Governor Adriana Kugler said she is resigning effective Aug. 8 and returning to academia.

This paves the way for Trump to appoint someone more aligned with his low interest rate view as her repacement, . 

So the new trading month kicks off with world markets on a shaky footing, and the economy too. Asia's factory activity is deteriorating as tariff uncertainty weighs, and U.S. manufacturing is still in a funk. European factory activity is moving closer to stabilization, but is still contracting. 

Services, tech and AI-related activity and indicators are shining brighter of course, but even there caution will be creeping into investors' minds. Earnings reports from Apple, Microsoft and Meta were well-received by the market, to put it mildly, but the Nasdaq still shed nearly 2% on the week.

August is the main summer holiday month in Europe and North America, so liquidity will thin out. With the VIX index back above 20.0 for the first time since April, trading next week could be choppy.

Here are some of the best things I read, watched and listened to this week: 

If you want evidence that President Trump's tariffs on the rest of the world are starting to push up U.S. goods inflation, look no further. According to Ernie Tedeschi at the Budget Lab at Yale, PCE durable goods prices in the first six months of the year rose 1.7%. Excluding the pandemic, that's the biggest six-month rise since 1987.

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