Last Saturday this is how we predicted market price action over this week:
If I had to guess, I would say we get a continued sideways-up trading on Mon and Tue (contingent on positive over-the-weekend news and maybe some new Treasury info), a push down following FOMC on Wednesday (as Powell rewards us with more hawkishness and does nothing), a reversal during after-hours on Wed, continued with a gap-up on Thursday, which will extend into Friday following more good earnings and positive tariff news.
It was going exactly like this - sideways, down after FOMC on Wed, up on earnings post-market and gap-up on Thursday…
…until it didn’t.
I’ve underestimated both the Fed hawkishness that led the market during Thursday, despite good earnings results, and the tariff impact on the Friday deadline, which pulled markets down.
We talked about this possibility two weeks ago, but undoubtably got the timing wrong.
So what’s next?
First let’s understand what’s behind these moves. An important signal on Friday came from the labor market:
The world’s biggest economy added just 73,000 jobs in July, while hiring figures for May and June were lowered by a combined 258,000, in an unusually large revision by the Bureau of Labor Statistics. The 106,000 posts added from May to July marked a plunge from the 380,000 added in the previous three months. Friday’s report comes just days after GDP data suggested that the economy is losing momentum, with consumer spending cooling in the first half of 2025.
On Wednesday I told you about the GDP numbers coming in at a very strong 3%, with slight concern over reduced domestic consumption. Well, the labor market report reemphasized this concern as less jobs were added, and a major revision from prior months made the entire economy look slightly weaker than what everyone thought coming into this week.
Adding fuel to the fire was Trump not backing down on tariffs and implementing them across the board, albeit lower than what was feared in April, but still high enough to cause a stir. This is the overview of the rates applied across the major trading partners:
Still no final decision on China (facing its deadline on Aug 12, with a current rate of 30% still in place), while Mexico was given a 90 day extension to secure a deal, with a temporary 25% rate placed in that period. Canada has fared worst of the major trading partners and is facing 35% rates. As has Brazil with a 40% rate on top of the baseline 10%.
The tariff uncertainty is therefore not over. The impact on Canada is an issue for markets, as are deals with China and Mexico. During a traditionally turbulent August and September for markets, we might see some pullbacks here, before we can continue pumping our bubble back to new all-time highs.
Mixed signals
In general, we could say that we got a number of mixed signals this week. On one hand, coming in and out of FOMC on Wed, Powell’s hawkishness reduced the probability of a September rate cut. Probability of a rate cut dropped to 40% (from 65% before the meeting). Strong labor market, strong economy, asset bubbles - no reason to cut just yet, right?
But after Friday’s labor market revisions the probability of a Sep rate cut is now at 80%, with at least one more cut priced in before the end of the year (and a third one in January).