Week Ahead: Markets to assess tanking US labour market and tariff impact

It’s no surprise that it is a much quieter calendar week of big risk events. But markets will still be digesting Friday’s shocking US labour market report, while trying to navigate more tariff turmoil with another deadline imposed  by President Trump looming. We also have a Bank of England meeting to look forward to, with a rate cut baked in and traders looking to policymakers for forward guidance and any hint at a faster pace of policy easing.

Much weaker than forecast US payrolls data, with monster downward revisions sparked strong dollar selling on Friday as Fed rate cut bets got piled back on. A 25bps move in October is now fully priced in, while the September meeting sees above an 80% chance of a reduction, versus around 40% before the jobs figures were released. As we said last week, the Fed’s dual mandate is front and centre with inflation sticky and the labour market sinking.

Fed Chair Powell emphasised at the recent FOMC meeting that his focus was on the unemployment rate which remained low and steady at 4.2%. But he won’t be able to ignore the fact that the world’s biggest economy added just 106,000 jobs from May to July, down sharply from the 380,000 added in the previous three months. We get one more NFP report ahead of the September meeting, and the pressure to act is growing loudly, not least from the White House. Another soft jobs report should be enough to alter the majority of officials patient stance. That said, those are the same policymakers who were scarred by post pandemic ‘transitory’ inflation and their policy error on not eradicating price pressures sooner.

We wrote last time about the euphoria evident in market with several S&P 500 valuation metrics near record levels. We didn’t really get the blow-off top after M.M.A.A earnings we might have expected, but we are getting a correction, on disappointing results from Amazon and weak data. The S&P 500 had actually gone 23 straight days with moves of less than 1%, which further added to the extreme calmness which presaged the correction. We also note that it was only the third time in history that the benchmark index recorded three consecutive open-to-close drops from an all-time high close. Stocks tanked sharply after those two other events.

As for the dollar, it had been enjoying its longest win streak of six days since October, before Friday’s sharp sell-off. We note the ‘death cross’ on the weekly Dollar Index chart. That’s the first time the 50-day SMA has crossed below the 200-day SMA since January 2021. The previous two weekly bearish indicators of this type marked the bottom for USD and a rally followed. This time around, markets have to decide how much tariffs are going to impact over the medium-term, with other fundamental headwinds like fiscal policy remaining significant.

In Brief: major data releases of the week

Tuesday, 5 August 2025

– US ISM Services: July non-manufacturing ISM is forecast to rise back to 51.5 from 50.8. Orders rebounded in the last report, but employment contracted for the third time this year over tariff uncertainty. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy.

Thursday, 7 August 2025

– Bank of England Meeting: Markets expect the MPC to cut the base rate by 25bps to 4%. The labour market is loosening but inflation remains sticky with the headline at 3.6% and services at 4.7%. That likely means rate setters will stick to their current quarterly pace of policy easing going forward. There’s around 43bps of rate cuts priced in for 2025.

Friday, 8 August 2025

– Canada Jobs: Employment increases in June in wholesale and retail trade, plus in the tariff-exposed manufacturing sector, saw the first net increase in new jobs added since January. But unemployment remains elevated with more weakness potentially in industries sensitive to trade.

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