Written by Andrew Gillham, Head of Fixed Income.
Global stocks endured their worst week since early April after the announcement of more tariffs by the Donald Trump was followed by a weak jobs report on Friday which undermined confidence in the strength of the economy. The blue-chip S&P 500 and technology focussed Nasdaq fell 1.0% and 0.6% respectively.
The US president signed an executive order on Thursday, imposing tariffs on dozens of trading partners, including longtime allies Canada (35%) and Taiwan (20%). The order stated that Canada had failed to co-operate to curb fentanyl flowing across the border into the US, although Trump had warned earlier that Ottawa’s move to recognise a Palestinian state would make a trade deal “very hard”.
Other countries were hit with more punitive levies. Imports from Switzerland, such as watches, chocolate and machinery, face a 39% tariff rate and some Brazilian goods will be charged an additional 40% on top of its 10% base rate due to the White House’s anger at the country for prosecuting former president Jair Bolsonaro for allegedly plotting a military coup to stop President Lula da Silva from taking office.
Just as markets were digesting the latest wave of tariff announcements, the nonfarm payrolls report released at lunchtime on Friday provided more reasons for investors to be cautious. The report issued by the Bureau of Labor Statistics revealed that the US economy added just 73,000 jobs in July but more worryingly, the hiring numbers previously reported for May and June were revised down by 258,000.
The data release prompted an immediate response from the president on his Truth Social media platform, demanding that the Federal Reserve cut interest rates to boost the economy. He posted that Federal Reserve Chair “Jerome ‘Too Late’ Powell is a disaster. DROP THE RATE!”.
The president also order officials to fire the Bureau’s commissioner Erika McEntarfer, who had been appointed by the Biden administration, accusing her of rigging the data over the summer, and ahead of last year’s presidential election, to make the Republicans look bad. The unprecedented move drew criticism from far and wide for undermining the credibility of the US statistical system.
Earlier in the week, markets continued to set new all-time highs on the back of some very strong second earnings reports, led the technology titans Meta Platforms, Microsoft and Apple.
Shares in Facebook’s parent Meta Platforms jumped 11% on Thursday, adding $180 billion in market value, after it reported a 22% jump in revenues to $47.5 billion, supported by its evolving AI technology which is integrated into its advertising products. However, it was CEO Mark Zuckerberg’s ambitions for AI which garnered most excitement from investors. The company expects to invest up $72 billion this year on new data centres and signing on bonuses worth hundreds of millions of dollars to lure top AI researchers from rivals to work in its Meta Superintelligence Labs to build human-level AI capabilities.
Microsoft gained 4% on Thursday and became the second company, after Nvidia, to reach a $4 trillion market valuation. Its earnings report was highlighted by 34% annual increase in revenue at its Azure cloud computing business, the centrepiece of its efforts to shift its focus to AI. CEO Satya Nadella asserted that the company is scaling its “data centre capacity faster than any other competitor”.
Apple’s shares jumped in after-hours trading on Thursday evening after it reported iPhone sales increased 13% during the second quarter from a year earlier. However, it was caught up in the broader market sell-off a day later and its shares remain 20% underwater year-to-date. It has impacted more than most by the tariffs and has lost ground in China to rivals such as Huawei and Xiaomi.
In commodity markets, Brent Crude edged lower to $69 a barrel after the Opec+ cartel agreed on Sunday to raise production to a two-year high of 547,000 barrels a day from September. Traders also weighed a threat from President Trump to substantially increase tariffs on Indian exports to the US if the country continued to buy Russian oil.
This week’s economic calendar is headlined by the Bank of England’s Monetary Policy Committee meeting and money markets are pricing it as a near certainty (97% chance) that it will announce a quarter of a percentage point interest rate cut to bring its base rate down to 4%. Although elevated inflation remains a concern, the deteriorating outlook for the jobs market suggest the economy needs more support.
