Stocks rise as investors cling to hopes for US rate cuts

Global stocks rebounded Monday, driven by increased hopes for a September Federal Reserve rate cut, now at 85% probability, following a significantly weaker U.S. jobs report for July and substantial prior revisions. This data, indicating a pronounced labor market weakening, initially caused a Wall Street selloff, with the S&P 500 down 1.6%, but subsequently fueled expectations for monetary easing. Concerns over the credibility of U.S. economic data and potential politicization of Fed policy also emerged.

Analysis

Global equity markets are rebounding based on heightened expectations for Federal Reserve monetary easing, a direct reaction to a significantly weak U.S. jobs report. The report not only missed July expectations but also included substantial downward revisions for May and June, causing the three-month average job growth to plummet from 231,000 to 35,000. This has cemented market conviction for a policy pivot, with a September rate cut now priced at an 85% probability. This sentiment shift initially triggered a sharp sell-off on Friday, with the S&P 500 falling 1.6%, but has since reversed, with European and U.S. futures showing gains. The bond market has already priced in this easing, evidenced by the nearly 25 basis point drop in two-year Treasury yields. However, this dynamic is complicated by rising political risks, including the firing of the head of Labor Statistics and a new Fed governorship appointment, which raises concerns over the politicization of the Fed and the credibility of U.S. economic data. In other markets, oil prices are declining, with Brent crude down 1.7% after OPEC+ agreed to increase September output, while the dollar is stabilizing after its largest one-day fall since April.

Key Decisions for Investors

• Given the market's 'bad news is good news' reaction, investors should prioritize monitoring leading economic indicators, as further U.S. labor market weakness could reinforce the bullish case for equities by solidifying Fed rate cut expectations.
• It is crucial to factor in the rising political risk premium associated with U.S. assets, as concerns over the politicization of the Fed and the veracity of economic data could introduce significant market volatility.
• The inverse performance of oil and gold highlights a market divergence; portfolio allocations should reflect that oil faces supply-side headwinds from OPEC+ actions, while gold's strength is tied to expectations of lower real yields.
• Exercise caution in specific currency pairs like USD/CHF, as the imposition of a 39% tariff on Swiss imports demonstrates that unilateral trade policy can abruptly override traditional macroeconomic drivers.