The Context
While last week’s note promised an eventful ride for the global economy and markets, the reality proved to be an even bumpier rollercoaster that rattled markets and undermined the economic consensus for the US.
The Federal Reserve’s policy meeting on Wednesday set the stage, with officials deciding against a rate cut. However, the dissent by two Board Governors—the first in over thirty years—was seemingly validated just two days later by a surprisingly weak jobs report. The headline miss on monthly job creation was accompanied by a massive 258,000 downward revision to the prior two months, causing the three-month moving average to collapse to its lowest level in years. At 4.248%, the US unemployment rate was at its highest level since October 2021, even as the Fed’s preferred inflation gauge (core PCE) came in at 2.8%.
The outlook for the Fed may be further complicated by Friday’s announcement that Governor Kugler would resign effective August 8. This gives President Trump a new opportunity to reshape the central bank’s decision-making body. This move, which followed news that the President intends to fire the head of the Bureau of Labor Statistics, will likely lead analysts to treat the Fed nomination process with a tone and intensity typically reserved for Supreme Court nominations.
On the economic front, second-quarter GDP growth estimates for both the Eurozone and the US came in above consensus forecasts. However, the similarity ended there, as America’s growth again outpaced Europe’s by a significant margin.
Finally, the week ended with a deluge of new tariff announcements from the US administration. This followed a rather lopsided agreement with Europe favoring America, in which the EU agreed to a general 15% tariff rate (and 50% on aluminum and steel), as well as commitments to purchase US exports and invest in the US.
The only crystal-clear conclusion from all the tariff news is that the global economy continues to transition away from a multi-decade trajectory of converging toward lower and more consistent tariffs to an environment characterized by higher, less uniform, and more volatile tariffs. Beyond this, it is too early to reach confident macro and sector-specific findings, as the US tariff regime remains unpredictable, international negotiations are ongoing, and the full behavioral reactions of exporters, importers, and consumers are still unfolding.
As a result of this volatility, US stock markets gave back some of their recent gains. After two solid weeks of climbing to new highs, the Russell small-cap index led other major indices by losing more than 4%. The VIX saw its largest surge higher since April, coinciding with the biggest NASDAQ give back since then. Government bond yields slumped, with the move in the 2-year on Friday amounting to an eye-popping 28 basis points as expectations of a September Fed cut surged from under 40% (on the back of Chair Powell’s relatively hawkish remarks) to over 80% (after the weak jobs report). The dollar also experienced a similar whipsaw.
Looking Forward
After a week of intense market-moving events and political intrigue, the week ahead appears deceptively quiet on paper. However, beneath the surface, several key developments could easily trigger further economic and financial volatility.
Central Banks: The Bank of England Takes the Stage
The main central bank focus will be the Monetary Policy Committee (MPC) meeting at the Bank of England on Thursday. Officials are widely expected to agree to a 25 basis point rate cut, but the decision is unlikely to be unanimous as two relatively hawkish members of the MPC coule well dissent. The committee will likely be focused on recent signs of a weakening labor market and cooling pay growth, but will remain cautious due to lingering inflation risks from the new tariffs.
Political Undercurrents
On the political front, markets will be watching closely for any news from the White House regarding the soon-to-be-vacant Federal Reserve Board seat. The timing of President Trump’s nomination could add to the political narrative surrounding the central bank, especially if the President decides to opt for the “shadow chair” route first outlined by Treasury Secretary Bessent a few months ago. The ongoing US tariff negotiations, with the latest wave of tariffs set to take effect on August 7, will also remain a key focus for economists and markets.
Data to Watch
The US data calendar is significantly lighter this week, but analysts will be closely scrutinizing a few key releases for further clues on the economy’s health.
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ISM Manufacturing PMI: While the headline number is expected to show continued contraction in the manufacturing sector, markets will be looking for signs of stabilization in components like new orders and production.
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Productivity and Factory Orders: These reports will provide further clues on the health of the US industrial sector and a glimpse into business spending trends.
In Europe, the spotlight will be on Germany’s industrial production data, a crucial indicator for the Eurozone’s largest economy, and Eurozone retail sales and services PMI, which will offer a clearer picture of consumer spending and the health of the broader service sector. We will also get the Sentix investor confidence measure, as well as PPI inflation.
As for China, watch for trade, PMIs, and CPI/PPI inflation—all of which will help us assess whether the economy is defying a structural solidification of deflationary tendencies.
Earnings on the Docket
The earnings season continues with several high-profile companies reporting results. Investors will be looking for insights into the impact of the latest economic headwinds on consumer-facing brands and tech companies.
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Disney: Investors will focus on subscriber growth for its streaming services and performance in its theme parks.
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McDonald’s: The company’s report will provide a key reading on global consumer spending and a measure of inflationary pressures on its business.
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Palantir: Analysts will be looking for continued growth in government contracts and strong revenue from its AI platforms.
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Pfizer: The market will be watching for updates on its drug pipeline and the performance of key products.
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Uber: The focus will be on the company’s growth in both ride-sharing and food delivery, and its path to profitability.
