I shot the sherriff, but it was in self defence

What felt like a never-ending bull market came to an abrupt halt on Friday, as once again, August seems to be a month when the markets face a dose of reality. An employment report, suggesting the weakest three-month job growth outside the pandemic since 2011, coincidentally, was a catalyst this time last year for a market correction, combined with a disappointing supply managers’ survey, which quickly knocked the wind out of US equity markets and the US dollar. The poor lady who delivered the weak jobs numbers that were released on Friday got fired for her efforts. Economists often question the validity of data from the likes of China, suspicious of political meddling to flatter the economic picture. Trump’s move on Friday could lead investors to have the same concerns if the messenger could get shot for delivering unwelcome news. Janet Yellen summed it up pretty well, describing the decision as “the kind of thing you would only expect to see in a banana republic.” Markets will be concerned that when a political leader meddles in government data, it rarely ends well.

I guess when it rains it pours comes to mind as late on Friday, just before the markets closed, news that the Fed Governor Adriana Kugler was resigning. This could create an opportunity for Trump to further interfere in the coming weeks and put the candidate of his choice on the board, potentially the next Fed chair, further undermining Powell’s position. The Vix spiked over 20% on Friday.

On the plus side, a weaker jobs report does encourage the hope that US interest rates could be cut in September, at the Fed’s next meeting; however, on Thursday, the latest PCE deflator version of inflation suggested the underlying inflationary pressures remain. Both headline and core inflation rates accelerated back above a 3% annualised pace last month, and year-over-year inflation remains closer to 3% than the Fed’s target 2%. The yield on the 2 year US treasury, the most sensitive to changes in interest rate sentiment, fell to 3.71%, it was closer to 4% at the start of the week. Suggesting the market has priced in a much greater chance of a cut in September.

What to look out for this week, firstly, the S&P Global Service sector PMI surveys will provide their monthly insights of global economic trends, particularly in the face of ongoing tariff-related uncertainty. Then, on Thursday, the Bank of England meets to set interest rates in a very unclear economic picture. The members of the committee are expected to vote in favour of a cut of 25 basis points, but it’s unlikely to be a unanimous decision. On the one hand, much of the economic data points to a weak economy, but whilst the rate of inflation remains well above the Bank’s target, there will be those on the committee who will be reluctant to ease monetary policy.

Markets in Europe do not appear to be opening in too bad a shape, after all, they took quite a knock on Friday, the Euro Stoxx fifty falling almost 3%. The S&P 500 futures are holding steady for now. One should not rule out more volatility in the coming weeks.