The Tide Has Turned

September 8, 2025

Financial Markets

Last week’s U.S. employment report marked a notable shift in investor and analyst sentiment regarding the likely direction of interest rates. The disappointing figures—representing several consecutive weak job reports—came just a couple of weeks after Chair Powell’s dovish comments at the Jackson Hole symposium.

Traders now broadly anticipate that the Fed will begin easing rates in September. This pivot has been most visible in rate-sensitive sectors. The homebuilding industry, which elevated borrowing costs had pressured, has shown signs of recovery as yields declined.

Equity market performance was mixed overall. While headline indexes pulled back from record territory, several industry groups demonstrated resilience, highlighting the uneven nature of the current environment.

Economics

Friday’s Employment Situation report showed 22,000 payroll additions in August, well below consensus estimates for a 77,000 gain, with mixed revisions to prior months. Of note, June’s report was marked down to a 13,000-job loss, the weakest print since December of 2020, and the unemployment rate ticked up to 4.3%. This marks another consecutive weaker-than-expected report, underscoring a clear cooling trend since spring. The data increased market confidence that the Fed will cut rates at the September meeting.

Lower interest rates would provide support to the economy, but questions remain about whether they can fully offset structural challenges. As we have often noted, consumer spending and employment are the cornerstone of U.S. growth. Currently, both metrics show signs of strain. Consumer sentiment surveys point to rising concerns about inflation, while some business leaders are responding to tariff uncertainty with higher prices and more cautious earnings guidance.

The resurgence of tariffs continues to weigh on the outlook. Trade actions have already begun to alter global supply chains, encouraging the formation of regional alliances that increasingly exclude the United States. The latest example is the tariff dispute with India—a country long viewed as a promising economic partner. By imposing severe tariffs, the U.S. risks pushing India closer to China, potentially reshaping trade dynamics in Asia.

In a significant legal development, a federal appeals court recently declared most of President Trump’s global tariffs unlawful under the International Emergency Economic Powers Act (IEEPA). While the tariffs remain in place pending appeal until at least October 14, the ruling introduces a new layer of uncertainty. President Trump denounced the decision and warned of severe consequences if the judgment is not overturned.

Conclusion

The United States remains the world’s economic powerhouse, and the dollar’s reserve currency status is not threatened. However, markets may not fully reflect the challenges of softening labor data, tariff risks, and weakening sentiment. Investors should remain alert to the possibility that economic headwinds could weigh more heavily on growth than markets currently anticipate.

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