Cailian Press, August 3rd (Editor: Xia Junxiong)
For months, Wall Street has been unconcerned about the trade war initiated by U.S. President Donald Trump and the dovish stance of the Federal Reserve, confident that a strong economy will continue to support market gains.
However, this confidence began to waver this week, with weak employment growth data compounded by Trump’s new round of tariffs, leaving the market astonished.
Since the crash in April due to Trump’s “equal tariffs,” the U.S. stock market has rebounded strongly, with the S&P 500 and Nasdaq repeatedly hitting new highs. However, the U.S. employment report for Friday served as a heavy blow, completely disrupting the tranquility.
Data showed that U.S. non-farm payrolls only increased by 73,000 in July, far below the economists’ forecast of 100,000. More importantly, the May and June data were significantly downgraded, with May’s job growth from the initially reported 144,000 revised down to 19,000, and June’s from 147,000 down to just 14,000.
With significant slowdown in U.S. employment growth, risk aversion sentiment has heated up. All three major U.S. stock indexes fell more than 1% on Friday, with the Nasdaq dropping 2%.
At the same time, investors flocked into the U.S. bond market, driving the yield on two-year Treasury bonds to plummet to 3.68%, marking the largest single-day drop since December 2023. Bond prices and yields are inversely related.
“We believe that today’s data release is best summarized with one word: ‘bad news is bad news’,” said Jeff Schulze, Chief Economist and Market Strategist at ClearBridge Investments, on Friday.
The theory that “bad news is good news” has long been one of the drivers of U.S. stock market gains, based on the logic that an economic downturn means the Federal Reserve will increase its rate cuts, thereby benefiting risk assets like U.S. stocks.
Schulze stated, “With employment growth stalling and a new round of tariffs on the horizon, the negative employment data for non-farm payrolls in the coming months is entirely possible, which could trigger market concerns about an economic recession.”
The weakening job market has also significantly increased traders’ bets on the Federal Reserve’s interest rate cuts, jumping from 40% earlier this week to 91%, leading to a $1 drop in the dollar on Friday, marking the largest single-day decline since April.
Friday also marks the day when Trump’s new round of tariff measures take effect, with new tariff rates ranging between 10% and 41%, adding extra pressure to market sentiment.
Trump’s latest tariff measures have raised the average U.S. tariff rate on global imports to 15%, the highest level since the 1930s.
Moreover, geopolitical tensions have intensified market risk aversion. On Friday, Trump declared that he had ordered nuclear submarines to be deployed to “relevant regions” in response to Russia’s former President Medvedev’s “very provocative” remarks.
This contrasts sharply with market sentiment in July, when the dollar surged and safe-haven assets were sold off, with U.S. stocks outperforming the global market under strong financial reports and economic data.
Since April, the total market value of global stocks has increased by $15 trillion, but investors are now reassessing the economic reality behind this rally, causing intense market fluctuations.
The Cboe Volatility Index (VIX), known as the “fear index” for U.S. stocks, has jumped to over 20, marking the first time since early April when “equal tariffs” triggered market turmoil. Volatility indicators for high-yield bonds and investment-grade bonds have also risen simultaneously.
The simultaneous downturn in the dollar and U.S. stocks once again reminds the market that U.S. assets are not impervious to economic and geopolitical shocks.
“Despite the strong economic performance over the past few months and the easing of concerns about tariffs, the current weak employment data combined with uncertainty surrounding tariffs poses new challenges to the market,” said Jeffrey Palma, Head of Multi-Asset Solutions at Cohen & Steers. “This situation once again reminds us that there are many risks ahead.”