Autumn has arrived, but the big-economic-developments-in-South-America bandwagon rolls on, dragging market expectations and developing-currency movements along with it. The Trump administration is prioritizing tax cuts over spending cuts, while the labor market reveals signs of slowdown in job creation. At the same time, worries about inflation bubble up in France and the dollar turns into the new bogey for investors.
The upcoming economic landscape indicates President Donald Trump’s steadfast commitment to tariffs, which could affect trade dynamics with the Eurozone that has yet to secure a trade agreement with the United States. The dollar share has recently returned to being well above 50 percent of the G10 foreign exchange market, its leading currency status. Now, everybody is looking at the next slew of data releases and central bank decisions that will be dictating market sentiment.
Tax Cuts and Labor Market Concerns
Add to that the Trump administration’s laser-like focus on implementing as many tax cuts as possible. They’re counting on no big cuts to spending. This strategy is designed to jumpstart the economy and increase consumer demand. The administration’s approach is a very welcome indication of continued commitment to administration policies that favor lower tax burdens on individuals and businesses as well.
This rosy fiscal picture stands in sharp contradiction to the prevailing expectations for the US labor market. Analysts expect the job creation to decelerate quickly – a harbinger of trouble ahead for GDP growth more than likely. Notwithstanding these worries, the unemployment rate should continue to hover at 4.2%. This relative stability should be a comforting factor to policymakers, as they look to juggle the multifaceted changes that are rocking the labor shift.
Investors know that the longer-term implications of these worrisome labor market trends are significant. They know that a weakening labor market can rattle consumers’ nerves. As businesses and workers adjust to this shift, spending patterns will change and, in turn, the overall economy will be impacted. Indeed, going forward, market participants will look to future labor reports with great interest for additional clues on the pace of job creation and the unemployment trend.
Currency Movements and Inflation Pressures
After a rough July, the dollar had a strong comeback last week, retaking the title of best currency in G10 foreign exchange universe. This dollar resurgence further highlights the dollar’s surprising strength despite the troubling global economic landscape. Investors are most interested in the effects currency fluctuations will have on trade patterns as well, particularly with tariffs involved.
President Trump upped the ante exponentially with his announcement this past weekend that he would double tariffs on steel and aluminum. This decision further complicates the currency landscape. The administration has a deep ideological desire to keep tariffs. Such a position would risk permanent trade fractures, resulting in possible domestic and international recession.
Across the Atlantic, inflation figures in Europe tell an unusual story. In France, inflation is still hiding, leaving monetary policymakers to wonder whether monetary policy is working well enough. Headline inflation is expected to fall from 2.2% to 2.1%. This change underscores the difficulty of sustaining inflationary pressures in the Euro area that remain a big challenge.
Bond Market Developments
Bond markets have experienced notable shifts. The UK saw its 10-year yield rise by 16 basis points last month, reflecting a growing expectation of tighter monetary policy. While at the same time, Japanese yields rose 11 basis points over the same timeframe. These two developments are just a signal of a more significant wave of yields increasing in other markets around the world.
As far as North America, the news on bond markets seems a bit more grim. Demand disappeared in a wave — last month, we watched our 10-year yields spike by 20 bps almost overnight. At the same time, Canada had an even larger increase of 30 bp. These kinds of movements can be a strong signal that investors are getting worried about growing fiscal irresponsibility and inflationary pressures from continued economic re-adjustment.
Indeed, last month, the S&P 500 semiconductor index was the best-performing sector. This underscores the persistent power of tech-related stocks, even during broader sell-offs in the markets. This sector’s performance is likely to be a harbinger of investor confidence in accelerating and converging technological advancements and their potential to drive future economic growth.