Stock market plummets most significantly since May, following reduction in job creation and implementation of tariffs
The U.S. stock market experienced a turbulent week, with the S&P 500 recording its biggest decline since May and the Dow Jones Industrial Average falling 1.2%, following the release of weaker-than-expected July employment data. This economic downturn has led to a significant increase in market expectations for a Federal Reserve interest rate cut in September 2025, with probabilities climbing above 80%.
The labor market appears to be showing signs of strain, according to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. The Labor Department reported revisions that shaved a total of 258,000 jobs off May and June payrolls.
Goldman Sachs Research estimates the odds of a rate cut in September to be somewhat above 50%, projecting a series of 25-basis-point cuts starting then. Similarly, the CME FedWatch Tool showed market-implied probabilities of a September rate cut increasing from about 40% before the jobs data release to over 80% after the report on August 1.
Deutsche Bank noted a surge in the probability of a September rate cut to 87%, reflecting changing views within the Federal Open Market Committee (FOMC), including some dissenters favoring rate cuts due to labor market softening.
Despite the market turbulence, the Fed kept rates steady at its most recent meeting this week. However, the Fed remains cautious about cutting interest rates due to concerns about tariffs adding to inflation and weighing down economic growth.
The yield on the two-year Treasury plunged to 3.68% after the hiring report was released, while the yield on the 10-year Treasury fell to 4.21%. Some banks have begun adjusting consumer interest rates, such as Certificate of Deposit (CD) rates, in anticipation of these cuts, with some already lowering rates slightly in August.
President Donald Trump announced tariff rates on dozens of countries, and the tariff effective date was pushed back to Aug. 7. Companies such as Walmart, Procter & Gamble, and others have warned about import taxes raising costs, eating into profits, and raising prices for consumers.
It is important to note that the decision to cut the benchmark rate doesn't belong to Jerome Powell alone, but to the 12 members of the Federal Open Market Committee. The Fed counts "maximum employment" as one of its two mandates along with keeping prices stable. However, with the labor market showing signs of strain and inflation pressures easing, the consensus now leans strongly toward the Fed initiating rate cuts as soon as the September 2025 meeting.
The Nasdaq composite fell 2.2% on Friday, following the trend of other major indices. Amazon fell 8.3% despite reporting encouraging profit and sales for its most recent quarter, while Apple fell 2.5% after announcing that it expects a $1.1 billion hit from tariffs in the current quarter.
As the economic landscape continues to evolve, investors and businesses will closely watch the Fed's decisions in the coming months to understand the implications for interest rates, inflation, and economic growth.
- Microsoft, a major player in the business sector, could potentially benefit from the anticipated Federal Reserve interest rate cuts in September 2025, given their significant presence in technology-driven industries.
- The economic downturn and the surge in expectations for a September interest rate cut has led to speculation about job market growth in Seattle, where tech giants like Amazon are located.
- Government officials and economists are closely monitoring the casino-and-gambling industry, as a potential indicator of economic health, given its sensitivity to economic fluctuations.
- Amid the economic turbulence, the Amazon headquarters in Seattle, a city known for its thriving business environment, might experience job market instability due to the interplay of tariffs, interest rates, and inflation.
