Stock Market Plunges Most Since May Due to Decline in Job Hiring and Implementation of Tariffs
The Federal Reserve is contemplating a half-point interest rate cut in September, as the U.S. job market shows signs of slowing down and economic uncertainty looms due to tariffs. The July jobs report revealed significantly weaker job growth than anticipated, with substantial revisions to May and June payrolls, indicating a softening labor market. This slowdown mirrors patterns from last year when the Fed initiated rate cuts to support employment.
However, the emergence of new inflation risks from President Trump's trade war (tariffs) could curb the Fed's eagerness to cut rates aggressively, despite the labor market weakening. The three-month average of monthly payroll gains has dropped sharply to 35,000, a cycle low consistent with early recessions, bolstering the case for rate cuts to stimulate economic growth.
Contrary to last year, the unemployment rate remains relatively stable in a range of 4% to 4.2%. However, contraction signals are appearing, such as the Institute of Supply Management’s employment index for service businesses being below 50 for four of the last five months.
The Fed is under pressure to ease policy given the labor market softness, but must weigh this against the new inflation risks posed by tariffs, making a half-point rate cut a plausible option, but with some caution.
Elsewhere in the market, Exxon Mobil's stock decreased by 1.8% following a drop in profit and sales due to slumping oil prices. The market's odds of a quarter-point cut by the Federal Reserve in September rose to around 87%. The yield on the two-year Treasury plummeted from 3.94% to 3.68% just prior to the report's release.
President Donald Trump announced tariff rates on dozens of countries, pushing back the effective date to Aug. 7. This announcement led to a global stock market sell-off, with Germany's DAX falling 2.7%, France's CAC 40 falling 2.9%, and South Korea's Kospi tumbling 3.9%.
Technology behemoth Apple's stock fell 2.5% despite beating Wall Street's profit and revenue forecasts. Amazon's stock plunged 8.3%, despite reporting encouraging profit and sales for its most recent quarter.
Apple forecasted a $1.1 billion hit from tariffs in the current quarter, highlighting the impact of tariffs on businesses. The Fed may have a clearer path to a September interest rate cut if the current economic trend continues.
In other economic news, the Fed's preferred measure of inflation rose to 2.6% in June from 2.4% in May. The Labor Department revised down payrolls for May and June by a combined 258,000 jobs. The S&P 500, Dow, and Nasdaq all experienced significant declines on Friday, with the S&P 500 having its biggest decline since May 21.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, stated that the labor market showed signs of being affected by tariffs. Both Amazon and Apple face tougher operating conditions due to tariffs, underscoring the broader economic impact of these policies. The yield on the 10-year Treasury fell from 4.39% to 4.21% after the hiring report was released.
The Fed has remained cautious about cutting interest rates due to concerns about tariffs and their impact on inflation and economic growth. The ongoing trade tensions and their effects on the U.S. economy continue to be a major focus for the Fed as they consider their monetary policy decisions.
- The ongoing trade tensions, as exemplified by tariffs, are not only influencing the Fed's monetary policy decisions due to their potential impact on inflation and economic growth, but they are also affecting key players in the technology business, such as Apple and Amazon, causing considerable challenges in their operating conditions.
- While the Fed is under pressure to ease policy given the current economic trend and labor market softness, the emergence of new inflation risks from President Trump's trade war (tariffs) has made the business world increasingly uncertain, particularly in sectors like technology and manufacturing, where companies like Exxon Mobil are experiencing drops in profit and sales due to slumping oil prices and tariffs.
