8/1/25: Economic Data Prompts Caution in Markets

This week, financial markets were shaped by a combination of new economic data, Federal Reserve signals, and rising global trade tensions. Ahead of the August 1 deadline, the administration announced tariffs on several countries, with rates ranging from 10% to over 40%, set to begin August 7. Additionally, the Federal Open Market Committee held the federal funds rate steady at a target range of 4.25% - 4.50% at their meeting on July 30. Two members, Michelle Bowman and Christopher Waller, dissented, citing concerns over labor market softness and downside growth risks. Chair Powell reaffirmed a cautious, data driven approach, emphasizing that future policy decisions will depend on economic and trade developments.

The July jobs report added to investor uncertainty. Payrolls rose by 73,000, below expectations, and the unemployment rate increased to 4.2%. Significant downward revisions of -258,000 jobs to prior months and a lower labor force participation rate raised further concerns about the labor market’s momentum. Wage growth remained moderate, and the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures price index, rose to 2.6% year over year. Core PCE increased slightly to 2.8%, with both measures still just above the Federal Reserve’s long run target.

As investors digested the softer jobs data, Treasury yields moved lower. As of this morning, the 2-yearr yield stood near 3.72%, the 5-year at 3.79%, and the 10-year around 4.24%. These movements suggest growing expectations that the Federal Reserve may begin cutting rates later this year if economic conditions continue to weaken. Markets remain focused on key data, particularly employment and inflation, as drivers of potential policy shifts.

Equities reflected this cautious outlook. The S&P 500 declined about 1.2% after the labor report and tariff news. Copper prices dropped nearly 20% on July 30 after a 50% tariff was imposed on semi-finished copper products. Prices later stabilized between $4.36 and $4.38 per pound but remain down 15% in the month of July. In corporate news, Union Pacific announced an $85 billion agreement to acquire Norfolk Southern, aiming to form the first coast to coast freight railroad in the United States. While the merger could generate efficiencies, it will likely face regulatory and labor scrutiny.

Given this backdrop, the Chandler team continues to expect two 25 basis point rate cuts before year end, which would lower the federal funds target range to 3.75% - 4.00%. This view reflects signs of labor market weakness, stable inflation, and broader economic uncertainty. With fewer than five months remaining in 2025 and only three policy meetings left, the window for action is narrowing. We believe softer conditions are more likely to persist but remain ready to adapt if the data signals a stronger economy. The direction of policy will depend on how inflation, employment, and consumer trends evolve in the months ahead. 

Next week:  Factory Orders, Durable Goods Orders, ISM Services Index, Consumer Credit.

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