Tension returns to the markets. The dollar is weakening and European stock markets are accelerating their declines, amid growing concern over the first clear signs of an economic slowdown in the United States and fears of a new global recession. The slowdown in the labor market is compounded by a sharper contraction in industrial activity and a renewed tariff front launched by Donald Trump. A combination that has set off alarm bells among investors, causing an abrupt adjustment in expectations regarding the Federal Reserve's monetary policy. The stock markets, which had been hitting record highs in July, are slowing down, while the US currency resumes its decline.
In July, the US created 73,000 jobs, well below the 104,000 forecast by the Bloomberg consensus. But what was most revealing was the sharp downward revision of previous data: May fell from 139,000 to just 19,000 jobs, and June, from 147,000 to barely 14,000. The adjustment has been so pronounced that several analysts are already warning that the labor market has begun to lose momentum. At the same time, manufacturing activity contracted in July at the fastest pace in nine months. The ISM index fell to 48 points, its lowest level since the end of 2024, and has now been in a contractionary zone for five consecutive months. This fragility comes accompanied by the return of trade tensions. Trump has confirmed that new tariffs will go into effect on August 7, affecting imports from up to 200 countries. An announcement that brings its protectionist agenda back to the forefront and threatens to cause a further blow to global trade.
Against this backdrop, markets have recalibrated their interest rate expectations. They are now pricing in rate cuts at each of the three Federal Reserve meetings scheduled for 2025, with a probability exceeding 80% for the September meeting. “The massive revisions suggest that the labor market has lost momentum sooner than expected, and that President Trump's pressure for the Fed to act will only intensify,” notes ING. Precisely, the fragility of employment was the reason that led two members of the Fed Committee, Christopher Waller and Michelle Bowman, to vote this week against keeping rates unchanged. “The wait-and-see strategy is overly cautious,” Waller argued in a letter published this Friday.
Trump, who has stepped up his attacks on the Fed's independence, once again lashed out at its chairman."Jerome the Latecomer Powell must substantially lower rates, now! If he continues to refuse, the board should take over and do what everyone knows must be done," he said on social media.
The new wave of tariffs and clear signs of a cooling-off have accelerated the correction. Among currencies, the euro strengthened to 1.15."We didn't expect the euro-dollar to reach the 1.18-1.20 range again until the end of the year, but if the labor market continues to deteriorate, these levels could be reached sooner than expected," ING noted. Investors also took advantage of the opportunity to unwind positions in risky assets, with equities being the biggest loser. The Ibex 35, which struggled to hold the 14,300 point level for much of the session, lost 1.9% to 14,126.7 points. Although the decline is still far from the plunges of April—when the index lost more than 5% after Trump's first tariff challenge—it reflects a change in tone among investors that also coincides with a drop in trading on the stock markets.
Banks, until now the driving force of the Ibex, led the declines, with losses ranging from 4.5% for Santander to 1.2% for Bankinter. Once the euphoria of the earnings campaign has passed, expectations of lower rates and fears of recession are serving as a corrective to valuations. Along with the falls in the financial sector, the declines of ArcelorMittal (-2.7%) and IAG (-2.6%) stand out, companies with a clearly cyclical nature. In a session in which selling was widespread, only the most indebted firms, such as Cellnex (1.26%) or Telefónica (0.57%), and companies with stable revenues and attractive dividends—Endesa (0.08%) and Enagás (0.65%)—escaped the punishment.
The declines were even more pronounced in the rest of Europe, with drops of close to 3%. New tariffs and the renewed strength of the euro threaten to hurt exports, especially in economies like Germany and France, which have a strong export profile. At the close of European markets, Wall Street also fell more than 1%, in a session marked by changing expectations and growing concerns about the impact that an overly restrictive monetary policy could have on a labor market that is losing steam.
The new tariff framework represents an unprecedented jump in tax pressure on imports. According to Bloomberg economists, average rates will reach 15.2%, well above the 2.3% recorded in 2024 before Trump took office. The tariffs will generate annual revenue for the US of approximately $450 billion, according to estimates by RBC BlueBay, well above the $77 billion collected in 2024. This figure, equivalent to 1.25% of GDP, would allow Trump to slightly reduce the fiscal deficit and bring it below 7% of GDP.
Expectations of lower rates have led to a sharp readjustment of portfolios: as investors reduce their exposure to the stock market, they accelerate their bond purchases. This movement helps moderate yields, especially in the shorter end of the curve, which are more sensitive to monetary policy. Two-year US debt fell 23 basis points to 3.7%, its largest decline in twelve months. This is a similar reaction to that recorded exactly one year ago, when the yen appreciated and US employment data rekindled fears of a global recession. The fall in yields also extends to the long term: the ten-year bond fell to 4.2%, and the benchmark bond maturing in 2055 fell seven basis points to 4.8%.
