Market in a 'reckoning period' with weak jobs data & tariff hikes

Yahoo

5 days ago

The US added 73,000 jobs in July, a big miss from the 104,000 that economists were expecting. Unemployment also ticked up to 4.2% as estimated. Additionally, President Trump announced a flurry of new tariff rates overnight.
Interactive Brokers chief strategist Steve Sosnick, Citi economist Veronica Clark, UBS Global Wealth Management head of taxable fixed income strategy Leslie Falconio join Morning Brief with Julie Hyman to discuss the impact of a weakening labor market in combination with President Trump's tariffs.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief.
Speaking of the push pull, you've got the, you know, maybe, I don't know which is a push and which is a pull. You've got the weakening, uh, what looks like a weakening labor market on the one hand. And then on the other hand, you have overnight, President Trump announcing these tariff rates. What looks like is going to be an average tariff on goods coming to the US of at least 15%, some estimates would put it even higher, which in theory would at least cause a temporary upward pressure on inflation, which means the Fed is maybe in a tougher spot than ever.
Yeah, it's it's certainly not the ideal spot for the Fed. Um, and I think we probably will see more, you know, goods price increases. We just started to see that really in in June. Um, but if the labor market is weakening, then it really comes down to, you know, do we think these tariff increases are going to lead to persistent inflation? Um, is it a supply shock like the pandemic? And that's where if the labor market is weakening, it really isn't. Um, you could see these temporary, you know, one-time kind of price level resets in in goods prices. Um, but you wouldn't expect it to spread to services. We see wages slowing. Um, home prices have actually been falling on a monthly basis the last couple months. That underlying demand backdrop just looks very different.
Leslie, what does all of this mean for for bond yields and for yields sort of across the curve?
You know, this is it's really interesting because, you know, as much as we look at this data and we say that the Fed should cut, but we we, you know, it's it's it wasn't that long ago when we saw what happened in, you know, September 24 when they cut 50 and the back end actually rose just because of the concern over reacceleration inflation. It's very important that the Fed doesn't cut too soon simply because market perception will lead that back end higher, which obviously won't be good for the mortgage rate. You know, I think this this number is obviously weak. I don't think it really shifts the dynamic of the fact that the Fed will cut and they have a lot of ammunition to cut. But I don't think they're going to necessarily be that preemptive. I think this is one number, you need to and we need to see the data because, you know, the be careful what you wish for, which is exactly right, and might not lead to the results that, you know, one might think. And again, when we think about these this inflation related in terms of tariffs, it's really going to depend. Is this going to be a really quick, you know, price change that happens quickly over over a few months and then falls or is it just going to gradually rise higher, but then stay elevated above the Fed's projected target for a longer period of time? So they definitely have, you know, um, a lot to deal with, but I don't think this one number necessarily changes the projection, but it doesn't necessarily mean that, you know, cutting is going to assume that long-term interest rates are going to fall. You really have to wait and see and how some of these inflation numbers due to these tariffs actually come out over the next couple months.
Yeah, great point. Um, you know, and and sort of another reminder, be careful what you wish for, be careful what you expect. Um, Steve, you know, we don't seem to be in the bad news is good news, uh, vibe this morning, right? Yes, you have futures bouncing off the lows a little bit, but they're still sharply lower here. So again, that, you know, it sort of makes one question the like Fed galloping to the rescue narrative.
Well, I think the the mood actually changed a little bit. I think the the the whamies of the tariffs and some of the earnings reactions, um, you know, I think I I would actually say we're almost we were almost in a situation where all news was good news for this market. And now I think there's there's been a reassessment. There's been a rejiggering of that. Um, you know, to to Leslie's point, I'm I'm seeing the the the two to 10 year, uh, yields, the curve yield curve steepening by about seven basis points. That's a that's a big move. Um, I think right now, you know, that's telling us that's telling us some longer-term worries, um, about the relative the relativity of inflation. Um, also, I just think right now, you know, that the market had sort of put tariffs in the rear view mirror and assumed that the labor market was okay. Well, both of those assumptions have been overturned quite dramatically, uh, this morning. And so I think this is this is the market going through a reckoning period, and I think it's a bit of a tell that we're not seeing a lot of reflexive dip buying because that has characterized the stock market for the last, you know, two call it two, three months, um, where every dip was perceived as a buying opportunity. And as we saw them what I would say the half-life of dips was getting so short because no one wanted to miss a buyable dip, so they were just stepping in at the smallest possible opportunity. We're actually seeing it persist for a little bit this morning. That to me tells me that the psychology, at least as of this particular moment, is a bit, uh, more tenuous than it was, let's say even a couple days ago.
Um, and Veronica, you know, speaking of this sort of double whammy, I just want to ask you one more question about tariffs, which is what we learned overnight, why was it such a surprise?
Yeah, I mean, I think it comes down to, you know, we have been seeing these high rates and we saw that in in, um, announced in early April. Um, but we've gotten them delayed, and maybe now we're not getting them delayed. Um, in a lot of sense, some of these rates are not too dissimilar from what we saw announced on April 2nd. Um, so there is some of this persistence to actually follow through with with what's being announced. Um, of course, these are still starting maybe a week from now, so maybe there is still more chance to get them delayed. Um, but there is more willingness on the administration to to maybe follow through.