Fed September rate cut odds climb after soft jobs report
KUWAIT: US markets ended the week lower as weak July job data and aggressive tariff measures weighed on sentiment. The S&P 500 and Nasdaq posted notable losses, while Treasury yields fell sharply driven by rising expectations of a Fed rate cut in September amid signs of labor market softening. The US dollar weakened significantly on Friday, falling 0.83 percent on the day after soaring to a two-month high earlier due to the dovish shift in rate outlook, with traders now pricing in a greater than 95 percent chance of easing next meeting. Overall, risk assets pulled back and bond markets rallied as investors reassessed the economic outlook.
Trump trade deal with EU
President Trump announced that the US and the European Union have reached a framework trade deal on Sunday, introducing a 15 percent tariff on most EU imports. According to Trump, the agreement includes commitments for the EU to buy $750 billion worth of US energy and substantial arms purchases in the coming years. However, the US will maintain its 50 percent tariffs on steel and aluminum. EU leaders sharply criticized the US-EU trade agreement. German Chancellor Friedrich Merz warned the deal would inflict 'considerable damage' on the eurozone economy, whilst France's Prime Minister François Bayrou labelled it a 'dark day' for the bloc. Although the agreement prevented the imposition of a 30 percent tariff, the new 15 percent duty still represents a threefold increase from previous levels prior to April's 'Liberation Day' announcements.
Job openings fall
US job openings and hiring both declined in June, signaling a potential cooling in the labor market amid ongoing speculation about future Fed rate cuts. According to the Bureau of Labor Statistics, job openings fell to 7.44 million from 7.71 million in May, which had marked the highest level since November 2024. Hiring also slowed, dropping to 5.2 million from 5.47 million, with the hiring rate dipping to 3.3 percent, its lowest since November 2024. The quits rate, often seen as a sign of worker confidence, held steady at 2 percent, near decade lows.
US economic growth rebounded more than expected in Q2, with GDP rising at a 3 percent annualized rate after a 0.5 percent contraction in Q1, according to Commerce Department data. However, the headline figure masks underlying weakness: most of the rebound came from a sharp drop in imports following a Q1 stockpiling surge ahead of tariffs, which artificially added 5 percentage points to growth. Meanwhile, domestic demand grew at its slowest pace in 2.5 years, and consumer spending rose only modestly by 1.4 percent, reflecting lingering uncertainty from President Trump's tariff policies.
The US Federal Reserve held the benchmark interest rate at 4.25 percent-4.50 percent, unchanged since December. Fed Chair Jerome Powell avoided committing to future moves, saying, 'We haven't decided on September.' He emphasized that more economic data will be reviewed before the next meeting. Some analysts thought Powell might hint at a September cut unless data worsened, but he gave no such signal.
Inflation picked up in June, with the Federal Reserve's preferred measure, the core Personal Consumption Expenditures (PCE) index, rising 0.3 percent month-over-month, matching expectations and up from May's 0.2 percent increase. Annually, core PCE remained at 2.8 percent, slightly above the 2.7 percent forecast and higher than the Fed's 2 percent target. May's annual reading was also revised up from 2.7 percent to 2.8 percent. Despite pressure from President Trump, the Federal Reserve held interest rates steady at Wednesday's meeting. The Fed continues to monitor core PCE closely as it gauges whether inflation is easing toward its target.
Tariff deadline
President Donald Trump signed an executive order imposing new reciprocal tariffs ranging from 10 percent to 41 percent on imports from dozens of countries. The move came shortly after he extended tariff negotiations with Mexico by 90 days. Countries with which the US runs a trade surplus will continue to face a 10 percent tariff, unchanged from April 2. However, nations with a trade deficit with the US will now be subject to a 15 percent tariff, affecting around 40 countries. Over a dozen others will face even higher rates due to recent announcements or trade deals. The announcement triggered a sharp selloff in US equity markets, with all major indices closing significantly lower.
US job growth slowed significantly in July, with nonfarm payrolls rising by just 73,000, well below the 110,000 expected, and prior months' figures revised down by a combined 258,000 jobs. The unemployment rate rose to 4.2 percent, and labor force participation continued to decline, albeit at a slower pace. June's job gains were revised down to 14,000, the weakest in nearly five years, and May's were cut to just 19,000. The Bureau of Labor Statistics noted the revisions were unusually large. The weak data has reignited expectations for a Federal Reserve rate cut in September, after markets had previously anticipated action in October. The Greenback was last seen trading at 98.69.
Eurozone inflation
Eurozone inflation held steady at 2 percent in July, matching the European Central Bank's target for the second straight month and defying expectations of a slight decline. The stability was supported by lower energy prices and a stronger euro. Core inflation, which excludes food and energy, remained unchanged at 2.3 percent, while services inflation fell to 3.1 percent, its lowest level in over three years. The ECB has halved interest rates to 2 percent since last summer but kept them unchanged in July, with President Christine Lagarde noting a cautious 'wait-and-watch' stance amid ongoing uncertainty from global trade tensions. The EUR/USD currency pair was last seen trading at 1.1584.
The Bank of Canada kept its interest rate unchanged at 2.75 percent on Wednesday, citing continued economic resilience despite global trade tensions driven by US tariffs. Governor Tiff Macklem said the decision reflected a strong consensus among policymakers. While trade uncertainty remains, Canada's economy has held up better than expected, and core inflation remains persistent. This marks the third consecutive hold following similar decisions in April and June. Macklem noted that recent international agreements have eased fears of a worsening trade war but emphasized that rate cuts remain an option if conditions weaken. The USD/CAD currency pair was last seen trading at 1.3785.
Australia's inflation declines
Australia's inflation fell to 2.1 percent year-over-year in Q2, the lowest since March 2021 and just above the lower end of the Reserve Bank of Australia's 2–3 percent target range. This was below the 2.2 percent forecast by economists and down from 2.4 percent in Q1. Quarterly inflation also eased to 0.7 percent, under both the expected 0.8 percent and the previous quarter's 0.9 percent. Despite earlier signs supporting rate cuts, the RBA held its policy rate steady at 3.85 percent in its last meeting, defying market expectations, and aiming to ensure inflation stays within target according to the minutes. Following the inflation reading, markets are now largely expecting a 25-basis point cut at the RBA's upcoming August meeting. The AUD/USD currency pair was last seen trading at 0.6475.
BoJ maintains policy rate
The Bank of Japan (BOJ) raised its inflation forecasts on Thursday and expressed a slightly more optimistic view of the economy, keeping the door open for possible interest rate hikes this year. While leaving short-term rates unchanged at 0.5 percent, the BOJ noted that rising wages and prices could push inflation toward its 2 percent target. It also upgraded its inflation outlook for the next few years and signaled fewer risks to price growth. The yen strengthened slightly after the announcement, with some analysts predicting a rate hike as early as October. The decision comes as Japan benefits from a new trade deal with the US, which eases tariffs on key exports like cars, helping the economy withstand global trade tensions.
The USD/JPY currency pair was last seen trading at 147.36.
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