Wall Street experienced significant turbulence today, with major stock indices slumping and Treasury yields plummeting, driven by a confluence of disappointing domestic job growth figures and persistent uncertainty surrounding new trade tariffs.
The U.S. government’s latest report revealed a sharp slowdown in hiring last month, with employers adding a mere 73,000 jobs in July. This figure drastically underperformed economists’ expectations and was compounded by substantial downward revisions to May and June payrolls, shaving off a stunning 258,000 previously reported jobs, intensifying concerns about a weakening economy.
In response to the bleak job report, the bond market saw dramatic shifts. The yield on the benchmark 10-year Treasury note sharply declined from 4.39% to 4.24%, while the two-year Treasury yield, a key indicator of short-term interest rate expectations, plunged from 3.94% to 3.73%. These significant moves reflect heightened market anticipation of a dovish shift from the central bank.
Investors are now increasingly betting that the Federal Reserve will be compelled to cut interest rates to stimulate the sluggish job market. Although a rate cut could boost economic activity, it also carries the risk of exacerbating inflation, which continues to hover stubbornly above the central bank’s 2% target.
Adding to the Fed’s complexities, an update on its preferred inflation measure released on Thursday indicated that prices ticked higher in June, rising to 2.6% from 2.4% in May. The central bank has remained cautious about easing monetary policy, partly due to concerns that ongoing trade tariffs could further fuel inflation and impede economic growth.
Despite the inflation worries, the Federal Reserve operates under a dual mandate: maintaining stable prices and achieving maximum employment. The apparent weakening in the labor market, combined with the continued impact of tariffs, suggests that the balance may be tipping towards a policy shift aimed at bolstering employment. Wall Street traders are now pricing in an 80.9% chance of a quarter-point rate cut at the September meeting, a significant jump from prior expectations.
Compounding the economic anxieties, President Donald Trump’s fluid tariff policy continues to cast a shadow of uncertainty over businesses and investors. The latest extension of import taxes for a long list of countries, now set to take effect on August 7 for those without a deal, highlights the ongoing trade tensions impacting global commerce.
Major companies are already feeling the pinch from these economic headwinds and trade policies. Internet retail giant Amazon saw its stock fall 7.7%, and technology behemoth Apple declined 1.8%, despite both reporting strong quarterly profits and sales, indicating tougher operating conditions due to tariffs. Similarly, Exxon Mobil’s shares fell 1.7% after reporting its lowest profit in four years amidst slumping oil prices and increased OPEC+ production.
As Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, noted, “What had looked like a Teflon labor market showed some scratches this morning, as tariffs continue to work their way through the economy.” This sentiment suggests that the Federal Reserve, which previously seemed hesitant to lower rates, now faces a clearer path toward a September cut, especially if upcoming economic data confirms the recent trends.
