Weekly Newsletter: August 4, 2025
Being the bearer of bad news is a rough business. First up was Elon Musk and DOGE. Pilloried by both sides of the aisle and eventually by Trump. Fed Chair Powell, accused of being too late to cut rates and holding steady again this week, provided Trump with additional fodder to meddle with the Fed. Finally, the head of Labor Statistics got fired for the huge negative revisions to prior months’ employment data. Revisions to data happen all the time, and for many economists, it makes trying to determine the path of the economy very difficult. GDP data is revised three times, and by mid-year, the prior year’s growth is finally determined. Labor statistics have the prior two months revised each month, AND each February, the prior year is revised. This past February saw the prior two years revised. Housing data is usually reported for the period 2-3 months ago. It is little wonder that many look sideways at the various government reports and are willing to stake professional reputations and policies on their immediate meaning. A few phrases that investors have come to loath: “this time it’s different” and (inflation/growth/tariffs/something else) “is transitory.” This week will have little “serious” economic data, but plenty of Fed governors’ speeches, where a likely focus will be on the labor market.
In the world of “be careful what you wish for”, the huge revisions to prior months’ employment data provided many economists who had been talking about a weak labor market the opportunity for a victory lap. That weak data could be enough to push the Fed to lower rates in September, with the odds going from roughly 50/50 to 80%. That weakness and “need” for a rate cut could provide more of a headwind for stocks. While many believe lower rates will spur stocks, a historical view would say otherwise. Rates were being cut in 2000-2002, well before the markets finally bottomed in 2003. The same is true in 2008, before the bottom in 2009. Historically, yes, the Fed is late in cutting rates, as economic models (of all stripes) use data that is anywhere from 15 to 60 days old. It is extremely hard, in real time, to determine how an economy this large is doing at any given moment. Did the rate cuts of last year have (yet) any impact on the economy? Is more medicine (rate cuts) needed? How far should rates be cut before it is enough? Clearly, interest rates near zero (or negative, as was the case in many countries) are too low, but what is the correct level of interest rates? The interest rate on 10-year bonds today is roughly equal to the average rate on 10-year treasury bonds for the entire history of the bond. A few people are jockeying for the coveted post of Fed Chairman when Powell’s term is up in May. It will be much tougher when the stones are directed at you vs. getting to toss them at whoever is the Fed Chair.
Rates fell dramatically following the release of the jobs report as expectations for a Fed cut rose, but due to the specter of a weaker economy than many believe, and more rate cuts are possible at future meetings. Commodity prices fell to their lowest levels in two months, but many other measures of “stress” in the bond market were notably absent. High yield spreads to treasury yields remain near 20-year lows, and various measures of financial stress (using Fed data) are historically very low. The short portion of the yield curve dropped much more than the long-term end, as investors are pricing in Fed cuts, but remain concerned that inflation could be a problem. Typically, short-term rates follow the Fed, and long-term rates follow inflation expectations.
The big tech earnings came out and were generally received well. However, the technology sector as a whole fell back to levels of a month ago. It was a typical buy the rumor (of great earnings) and sell the news (that confirmed great earnings). It is now more about where tech companies go from here than looking back at how well they have done. Can they continue to spend capital building out data centers on the hopes that AI becomes a big money-making machine? Have investors forgotten about DeepSeek, which upended, briefly, the thought that AI would be a US-centric “thing”? As earnings season begins to wind down and analysts begin updating their projections for earnings, there are many companies that are struggling in this environment, either due to slower business/economy or the impact of tariffs and pricing on profits. The projections for earnings growth are likely to decline in the months ahead, especially as tariffs continue to be raised/lowered/adjusted. The biggest question is whether investors are willing to put a premium multiple on earnings that may be impacted by more tariffs and/or slower economic growth.
Fed chatter will likely be the focus this week as governors explain their views on the economy.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.