Macro
The July jobs report painted a much weaker picture of the U.S. labour market than previously thought, sparking concerns across financial markets. Markets responded swiftly: equities sold off, bonds rallied, and traders repriced expectations for Fed cuts, now anticipating two reductions this year.
The unemployment rate ticked up to 4.2%, while underemployment reached 7.9%. Job growth was narrowly concentrated, with 79,000 new positions in private education and healthcare, while most other sectors stalled or declined. Manufacturing shed jobs for a third consecutive month, leaving employment at its lowest level in more than three years.
Nonfarm payrolls rose by just 73,000, well below forecasts. More troublingly, May and June figures were revised down by a combined 258,000, cutting the three‑month average payroll gain from 150,000 to just 35,000, the weakest pace since the 2020 pandemic.
Wage growth held steady, with average hourly earnings up 0.3% month‑over‑month and 3.9% year‑over‑year, still running ahead of inflation. However, a slowdown in service-sector wages is emerging, typically signalling softer consumer spending.
This month’s report has reignited debate about the reliability of U.S. labour statistics. Roughly 40% of the downward revisions came from state and local government education, which the Bureau of Labour Statistics acknowledged was overstated in June.
Low survey participation is a growing issue: the initial response rate has fallen below 60%, compared with over 70% pre‑pandemic. Lower participation increases the likelihood of larger revisions, systematic biases, and serial correlation in the data. Revisions often cluster across adjacent months and industries such as education, healthcare, and government, creating the impression of sudden labour market swings.
During the pandemic, when official data reliability was strained, economists turned to alternative high‑frequency data, credit card spending, traffic flows, and private transaction data. Yet, little effort has been made since to integrate these tools into the official data collection process, leaving U.S. statistics vulnerable to persistent reliability issues.
The scale of recent revisions raises serious questions: if the Fed is truly data‑dependent, how can it navigate the economy when its inputs are so unreliable? A misread of labour market conditions risks policy errors, especially as the economy faces mounting headwinds in the second half of the year.
Friday’s report offered a dramatically different view of the labour market than previous releases. This could reflect an inflexion point in the economy, but it also underscores the fragility of the data itself.
Beyond short‑term volatility, structural changes continue to reshape the U.S. economy. Deglobalization and remote work have permanently altered the labour market’s composition, reinforcing the idea that the U.S. may be entering a new kind of business cycle, one where historical relationships, including payroll revisions and wage dynamics, behave differently than in the past.
This labour market weakness is unfolding alongside a sharp escalation in U.S. trade policy, which has added another layer of uncertainty. President Trump announced a series of tariffs with far‑reaching consequences, ranging from a relatively modest 10% charge on Saudi Arabia’s non‑oil exports to punitive 50% duties on Brazilian goods and as much as 55% on Chinese imports, pending ongoing negotiations. Canada, Switzerland, and India were also hit with steep new tariffs, while most of Europe faces a 15% baseline levy. The sudden breadth of these measures underscores Washington’s willingness to use access to the U.S. market as a political bargaining tool rather than purely an economic one. Courts are now weighing whether Trump even has the legal authority for such sweeping actions, injecting further uncertainty into the policy landscape.
Despite fears that tariffs would immediately derail growth, the global economy has shown more resilience than many expected. The IMF upgraded its 2025 world growth forecast to 3.0%, with modest upward revisions for China, India, and Saudi Arabia. Still, cracks are appearing: both U.S. and Chinese manufacturing PMIs slipped below the 50 threshold in July, while Germany and Italy registered quarterly GDP declines. In Europe, the Eurozone barely avoided contraction, expanding just 0.1% in Q2.
While headline inflation remains contained, pressure is building. The Fed’s preferred PCE measure rose to 2.6% year‑over‑year in June, its fastest pace in four months. Two FOMC members (Governors Waller and Bowman) broke ranks to vote for an immediate rate cut, the first double dissent since 1993, signalling internal division over the balance of risks. Markets are increasingly betting on a September cut, especially after July’s weak jobs data. Meanwhile, the ECB faces a different dynamic: Eurozone inflation remains subdued at 2.0%, allowing policymakers to maintain a dovish stance even as growth falters.
With tariffs still subject to negotiation and the Fed weighing cuts into a data‑uncertain environment, volatility is likely to remain elevated in the coming weeks.
Rates
Over the last three weeks, we discussed how rates were more range-bound and stable, with the MOVE index moving much lower. However, Friday’s payroll report changed that, triggering a significant repricing. For most of the week, the 2Y yield fluctuated between 3.85% and 3.95%, before suddenly breaking down to 3.72% after Friday’s labour market data release.
This sharp repricing was driven by traders immediately placing large bets on a more likely interest rate cut. On Thursday, odds of a September cut were priced at 45%, but by Friday they had surged to 90%. After the report’s release, influential figures such as BlackRock’s Fixed-Income CIO Rick Rieder went as far as to say they expect a 50 bps cut in September.
For the last two months, markets have been focused on potential tariff-induced inflation risks. Now, attention has suddenly shifted to unemployment. It’s a tricky time for the Fed, with its two mandates in conflict. One must remember it’s not only about the level of nominal rates but also about the economy’s velocity, which is much lower than when the Fed began hiking. As momentum in the labour and housing markets slows, high rates have an even bigger impact. Volatility is amplified by ongoing uncertainty. That said, the debt structure has evolved: households and corporates now hold a larger share of their obligations in long-term debt, moderating some of the immediate rate sensitivity.
The concern is that interest expenses are rising sharply, driven by higher public debt and elevated yields along the long end of the curve. This year, they are set to reach nearly USD 1 trillion ($952 billion, or 3.2% of U.S. GDP), surpassing the defence budget by a wide margin and becoming the second-largest budget item after Social Security. Interest payments now account for 18% of federal revenue, topping the previous record set in 1991. Within five years, they are projected to exceed the prior peak as a share of federal outlays of 15.4% in 1996.
Given this setup (with the long end anchored by GDP growth and fiscal concerns, and the short end driven by a Fed that is expected to cut), the yield curve is likely to steepen further. This dynamic will push investors to seek value further out on the curve, especially since a steeper curve enhances roll-down potential. However, for now, Treasury keeps its issuance focused on the short end of the curve. In its latest Quarterly Refunding Statement, the Treasury announced it will maintain auction sizes, holding the 3-year note at $58B, the 10-year at $44B, and the 30-year bond at $25B.
Fixed income is now in a place where there is too much money chasing too few yielding assets. Today, the U.S. private sector holds $25 trillion in cash on its balance sheets. On top of that, an additional $3 trillion in interest income, buybacks, and dividends must be reinvested each year. This represents a profound influence that the market continues to underestimate. For context, the Bloomberg U.S. Aggregate Bond Index (the “Agg”), a proxy for high‑quality bonds, stands at only around $29 trillion.
Credit
The credit markets remained exceptionally active in July, with U.S. high‑yield issuance topping $35 billion, following $32 billion in May and $37 billion in June. This marked the busiest July for junk bond sales since 2006. On the leveraged loan side, activity reached a record $222 billion in new launches, underscoring robust demand for risk assets.
Investment‑grade markets were also strong, with $81 billion in issuance, led by large bank deals from RBC ($2.75B), Deutsche Bank ($2B), and UBS ($2B). Despite the heavy calendar, investor appetite showed no sign of fatigue: liquidity remains abundant, and pent‑up demand continues to drive transactions.
A notable feature of this cycle has been the prevalence of liability management exercises (“extend and pretend”) strategies, which allow issuers to push out maturities. While they provide near‑term relief, these manoeuvres are now influencing the composition and risk profile of new issuance.
The leveraged loan market has increasingly become a direct competitor to private credit, particularly in sponsor‑backed deals. With collateralized loan obligations (CLOs) providing a large bid, leveraged loans now serve as a substitute for direct lending, offering sponsors greater flexibility.
This dynamic has created a tight link between middle‑market private equity, leveraged loans, and CLOs. Demand for loans remains so strong that investors are accepting weaker covenants and higher leverage, raising concerns about long‑term credit quality.
Adding to the risk, the private credit space offers limited price discovery. With few secondary trades and minimal mark‑to‑market transparency, cracks in lower‑quality assets may remain hidden until loans mature years later.
Against this backdrop, cautious credit investors are adopting more defensive positioning. Many are moving up the capital structure to mitigate downside risk, while others are keeping duration tight to ensure more frequent repayments, preserving flexibility for redeployment in a potentially more volatile environment.
Equities
U.S. equities pulled back this week, erasing the prior week’s gains after setting new record highs. Market breadth was weak, with the equal‑weight S&P ETF underperforming the cap‑weighted index by 93 basis points. Large‑cap technology stocks were mixed; while most declined, Microsoft (+2.0%) and Meta (+5.2%) delivered notable gains.
The retreat reflected markets internalising rising risks. Equities, which had surged earlier in the year on optimism around AI and tech investment, reversed sharply following tariff announcements and a weaker‑than‑expected U.S. jobs report. The S&P 500 fell more than 2% on the week, with European and Asian benchmarks also registering losses.
Sector performance showed wide divergences. Utilities (+1.52%), Technology (+1.41%), and Energy (+1.64%) led the outperformers, while Communication Services was essentially flat (+0.01%). Consumer Staples slipped –1.14%. The steepest losses came from Materials (–5.40%), Consumer Discretionary (–4.54%), and Healthcare (–3.86%), followed by Financials (–3.75%), Real Estate (–3.47%), and Industrials (–3.35%).
Meanwhile, the Q2 2025 earnings season continued to deliver strong results. With two‑thirds of companies having reported, 82% exceeded EPS estimates (the highest rate since 2021), and 79% beat revenue forecasts. Overall earnings grew 10.3% year over year, the third straight quarter of double‑digit gains, while revenues rose 6%, the fastest since late 2022. Communication Services led with +40.7% growth, driven by Meta, Alphabet, and Warner Bros. Discovery. Technology followed at +21.1%, buoyed by Apple, Microsoft, and semiconductors, while Financials gained +12.8% with support from JPMorgan, Capital One, Coinbase, and Allstate. On the revenue side, Technology (+14.8%), Health Care (+10.2%), and Communication Services (+9.5%) were the leaders. Energy was the clear laggard, with earnings down –20.3% and revenues off –7.6% due to oil prices falling to $63.68 from $80.66 a year earlier. Profit margins for the index held steady at 12.7%, above the five‑year average.
Markets reacted unevenly to results: companies that beat estimates saw modest gains, while misses were heavily punished. Intel, for example, fell 11% after disappointing earnings. Analysts have nudged Q3 forecasts higher, an unusual move since estimates typically decline early in a quarter, and continue to expect nearly 10% earnings growth for the year. Valuations remain elevated, with the S& P 500 trading at 22.2 times forward earnings versus a 10-year average of 18.5. Looking ahead, double‑digit earnings growth is projected to continue into 2026, supported by Technology, Communication Services, and Health Care, even as Energy remains a drag. Against this backdrop, the contrast between strong corporate fundamentals and risk‑off flows in bonds underscores how geopolitical and macroeconomic headwinds are beginning to test investor confidence.r, and project nearly 10% earnings growth for the full year.