A Potential Dangerous Environment
Next 10 Days Will Determine Where This Market Goes
Jobs Report:
The August jobs report released last week was very bearish. With just 22K jobs added and June and July data, which was already weak, revised further lower by 21K.
U.S. nonfarm payrolls rose by 22K in August, well below the +75K expected and the 79K jobs added in the prior month, which was revised from +73K according to data released by the Bureau of Labor Statistics on Friday.
Unlike July's upwardly revised reading, the payrolls number for June flipped negative to -13K from +14K. As such, employment in June and July combined was 21K lower than previously reported.
Link to Seeking Alpha News Article - Sep. 05, 2025
Dovish Cut or Hawkish Cut?
If the Fed was cutting interest rates because inflation was coming down and the job market was healthy, steady; then that would have been a good cut, a dovish cut. But with the Federal Reserve’s hand being forced by deteriorating labor market and increasing unemployment rate, is not a good sign for the economy or for the market.
But we don’t know if the Fed is going to actually cut just yet. While CNBC and Bloomberg are now discussing if we will get a 25 basis point cut or a 50 basis point cut in September, I am not sure if we will get one at all.
Big Week for Inflation:
This week, we get the PPI data on Wednesday and the CPI data on Thursday. The reason the Fed has not cut interest rates in almost a year is because inflation is elevated above 3%, far above the Fed’s 2% target.
Two Reasons that make the August’s inflation report so important:
1. After a 90-day delay, Trump’s country-specific "reciprocal tariffs" with higher rates, ranging from 10% to 40% (and even higher in some cases), were implemented on August 7th. So this is the first report where we are likely to see the bulk of Trump’s tariffs take effect. I would say we see the effect of these tariffs from now until the end of the year. As some businesses have pre-ordered in anticipation of the tariffs kicking in and are still selling down old inventory. Some retailers will also likely take a hit on their own margins, hoping this blows over and the trade war comes to an end but eventually most businesses will either start passing on the price hike or their profit margins will take a hit, eventually taking their stock lower. This is why I think it can take up to 6 months or so for us to see the full impact of tariffs. This also differs from the common belief that we will see a one time price hike which the Fed can ignore:
Their views are based on a text-book case of what tariffs do in an economy, " Atlanta Fed President Raphael Bostic said. "I think the situation today is different," he said. First, the tariffs have been rolled out over an extended period of time, which is not the classic text-book example. With tariffs in consumers' consciousness over a period of time, inflation expectations could shift.
The second difference is that these tariffs are intended to change supply chains "in pretty significant ways... Those structural changes should, I would expect, have implications for the dynamics for inflation in other things moving forward," Bostic said.
Furthermore, as businesses assess the tariffs, it will take anywhere from three to 12 months for them to adjust pricing strategies for the new environment.
Link to Seeking Alpha News Article - Aug. 01, 2025
2. This particular inflation report is coming days ahead of the Fed widely expected to cut interest rates. As I mentioned in the opening of this article, the interest rate cut expected on September 17th, would be a lot simpler if the inflation report expected this week were to come to be benign or soft. But if it is hot, then the Fed is likely still going to cut, but it is not going to be a bullish cut. So this inflation report will tell us if we have been forced into a stagflation environment owing to Trump’s trade war.
Usually, when the labor market is weakening and the economy is slowing down, people buy less goods and services, reducing demand and hence eventually the prices. But in our current scenario, while the labor market is slowing, the prices will likely not fall because they are artificially higher because of tariffs. The higher prices have nothing to do with the labor market and hence out of the Fed’s control. Which is a very scary place to be in.
Big Week for the Federal Reserve:
On September 17th, 2024, the FOMC will announce its rate cut decision. This is a monumental moment because the Fed will be in a really difficult spot if the inflation report is hotter than expected. Cutting interest rates cut further could fuel inflation higher and keeping rates steady could further damage the labor market.
So What Will Happen?:
I think, minus a historically disastrous inflation report, the Fed will cut in order to support the job market and provide support for the underlying weakness in the economy. If there is one thing you take away from this article, it should be that this is not a positive or a bullish or a dovish rate cut if the inflation report comes in hot this week.
Rate of Change Matters More Than The Level of Interest Rates:
Also, if you hear folks on TV talking about a 50 basis point rate cut in the September meeting or, 75 basis points rate cut by end of the year or you hear words like “Jumbo Rate Cuts”, just know that, that is not bullish. If someone on TV is saying we will have so many rate cuts and that is going to be bullish for the markets, they don’t have any clue what they are talking about and you should turn the TV off and never listen to that person again.
The actual level of interest rate does not matter as much as the volatility or the rate of change in interest rate levels. Kind of the same as tariffs. American businesses can do business and earn a profit in any environment, except in cases of uncertainty. When interest rates or tariff rates are changing rapidly, in that environment it becomes much harder to do business and make long term investment decisions, especially on a global scale.
I’ve written about the relationship between interest rates and stocks in more detail in the past. In Summary: If things are stable or moving slowly, things are great. There is less uncertainty and businesses love that. But if interest rates are going up rapidly or dropping too quickly, both those scenarios are negative for equity markets in the short run.
Federal Reserve Independence:
If all these concerns were not enough, there is also the risk of the markets losing faith in the Federal Reserve’s Independence with Fed Governor Lisa Cook already under attack and with Fed Chair Jerome Powell routinely being pressured by Trump to cut interest rates.
Let’s say the inflation this week comes in shockingly hot and the Fed still ends up cutting interest rates the following week because of the weak labour market. But what happens if the global markets read it as a cut to please Trump and hence conclude that the Fed has now lost its independence (even if just in part)? What happens then?
Stock Could Still Go Up:
Having said all of this, the way this market has behaved recently tells me that, even if all the worst things were to happen, which is that the Inflation report is insanely hot and the Fed still cuts, markets could still end up going up.
Markets have shocked me more than once by going when I thought it had no business going up. I am a believer that ANYTHING can happen in the markets, Nothing is Impossible. So even with a relatively bearish POV, I still think stocks can still go up.
My Positioning:
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