Market Mondays: Markets Reverse Course as August Begins

The month of August has opened with a notable reversal in global financial markets. Echoing similar moves seen in 2024, investor sentiment has turned swiftly in response to disappointing U.S. jobs data, rising trade tensions, and renewed expectations of monetary easing.

Weak U.S. Jobs Data Shifts Sentiment

The latest U.S. labour market data revealed a significant slowdown in job creation, compounded by downward revisions to previous months. This undercut assumptions of resilience in the U.S. economy and ignited fears that growth is losing momentum. In response, markets are now pricing in two Federal Reserve rate cuts before year-end, with an estimated 100 to 140 basis points of easing through 2026. Expectations for a September cut have firmed, despite the Fed's neutral tone at last week's FOMC meeting.

Market reaction was swift: equities dropped, gold rallied, Treasury yields declined, and the U.S. dollar weakened. Safe-haven demand has increased, with gold regaining momentum after recent stagnation.

Tariff Shock Amplifies Economic Risks

The expiration of the August 1 trade deal deadline has added another layer of concern. Average U.S. import tariffs are now expected to rise to nearly 18%, after a series of partial deals failed to sufficiently lower the trade barriers. Notable developments include:

• 25% tariffs on India, in part as retaliation for Russian oil purchases.
• 35% tariffs on Canada, though mitigated by USMCA carve-outs.
• A 15% base tariff on surplus-running countries and 10% on others.

These changes, effective from August 7, compound existing price pressures. Last week’s PCE inflation data came in hotter than expected, suggesting that the inflationary pass-through from tariffs is beginning to materialize.

While the Fed's December projection of 3.1% core PCE inflation leaves some wiggle room, the elevated tariff burden could force a revaluation of both growth and inflation trajectories.

Earnings Season Solid, But Not Stellar

Although corporate earnings have been broadly robust, especially outside of Big Tech, they haven't been extraordinary. Markets had rallied on strong earnings and economic resilience but were arguably overextended. The sudden influx of negative data has exposed fragile sentiment.

Despite the downturn, Monday opened with a rebound attempt in global equities, suggesting ongoing dip-buying interest. European and Japanese indices, as well as U.S. futures, pointed higher, indicating that investors are still willing to take positions on pullbacks.

Adding to market nerves, President Trump reportedly dismissed the head of the Bureau of Labor Statistics, accusing her of politically motivated data manipulation. This introduces fresh political risk, particularly as tensions between the Trump administration and the Federal Reserve resurface.

Bank of England Preview: A Tough Balancing Act

Attention now shifts to the Bank of England (BoE), which meets this Thursday. A 25bps rate cut is widely expected, placing the BoE squarely between the ECB and the Fed in terms of policy stance.

The UK economy faces slow growth and sticky services inflation. Labour market weakness is starting to emerge, increasing the risk of stagflation. The vote split will be closely watched, especially for signs that some Monetary Policy Committee (MPC) members are pushing for a 50bps cut.

The BoE faces structural economic challenges that rate cuts may not fully address. A Bloomberg report noted that while deposit rates have dropped, the mortgage market structure has delayed relief for households. Savers are feeling the pinch, but borrowers have yet to benefit from lower rates.

Looking Ahead

Markets remain fragile and reactive to headline risk. With limited U.S. data this week, focus will stay on:

• The application of new U.S. tariffs on August 7
• Remaining corporate earnings reports
• BoE policy messaging and vote split

Although the fundamental economic outlook remains uncertain, one thing is clear: investor sentiment is no longer unshakable. Traders will need to navigate a complex mix of macro risks, political drama, and central bank recalibrations as the second half of the year unfolds.