Market update: A stalling US economy?

Did last week represent a pivotal moment for the US economy and markets? It seems it could have, given the surprisingly weak labour market report which re-ignited expectations that the Federal Reserve (Fed) would cut interest rates at its policy meeting on 17 September.

Moreover, fears of a recession have increased. Overall there were four events that impacted market sentiment: the disappointing employment report; second quarter (Q2) GDP data; the announcement of additional tariffs to come into effect on 7 August; and the firing of the Commissioner of the Bureau of Labor Statistics (BLS), Erika McEntarfer.

Job numbers disappoint

The jobs report was the most shocking, given the large downward revisions to estimates of employment over the last three months. The new data shows barely any employment growth in 2025. If accurate, this has implications for consumer sentiment and spending. The amount of news coverage of the labour market report will also impact sentiment. Together with growing evidence of tariff-generated increases in consumer prices, the risk of a weaker consumer is clear. Consumer discretionary stocks were the worst hit on Friday 1 August, falling 3.5% on the day, making that sector the weakest performer so far, year to date.

As important to sentiment as the data is, the decision by President Donald Trump to fire the head of the BLS will cast doubt over the independence of economic data going forward. We already have concerns about Trump’s ambition to politicise the Fed. If economic data is subject to credibility issues as well, investors will have less conviction on macroeconomic-driven strategies. This could re-ignite the dollar bearishness.

The employment numbers showed a large drop in Federal Government jobs in the three months to July. Maybe the US Department of Government Efficiency - DOGE - was more successful than believed. It’s ironic that Trump was annoyed at the jobs data when one of its flagship policies in the wake of his inauguration might be in a large part responsible.

Front-loaded economic growth

The headline Q2 GDP data showed a 3.0% seasonally-adjusted annual growth rate, up from -0.5% in Q1. On the face of it, that is strong. However, the data has been subject to big swings in trade flows, related to tariffs. Domestic demand growth is slowing.

After the announcement of tariffs on 1 August, the Yale Budget Lab estimates the effective import tariff at 18.3%, the highest since 1934¹ . There have been numerous references to the impact on corporate earnings during the current Q2 reporting season. Inflation indicators have all ticked higher since April. Tariffs are a tax on US companies and consumers and meanwhile, jobs in manufacturing continue to decline.

I sense expectations have changed on the US economy’s near-term outlook. Recession risks have increased. The market is now pricing an 81% chance of a rate cut in September and over two cuts before the end of the year. However, given the inflation backdrop the Fed is in a tough spot. More evidence of labour market weakness is required for a move, but I guess that is what markets will possibly bet on now. The implications are curve steepening in US rates. For equities, however, the solid Q2 earnings numbers are hard to bet against. That leaves credit spreads still tight until the recession alarm bells ring a little louder.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, AXA IM, as of 4 August 2025, unless otherwise stated. Past performance should not be seen as a guide to future returns.