Talking Points
August 08, 2025 | 12:43
Life Moves Pretty Fast
Economics
Economics
The case for interest rate cuts has strengthened in a variety of economies since the start of August, after heading the other way for much of last month. This abrupt reversal has been most prominent in the U.S., with the July payrolls report and its infamous revisions sparking the quick turn. But that soft report didn’t happen in a vacuum, as both ISM reports also printed soft (services were just 50.1 in July) and continuing jobless claims have climbed to the highest in almost four years. To be sure, the consumer isn’t rolling over as auto sales were solid last month at 16.9 million a.r.; but, that resiliency will be tested as hefty tariffs are gradually passed on. |
The case for interest rate cuts has strengthened in a variety of economies since the start of August, after heading the other way for much of last month. This abrupt reversal has been most prominent in the U.S., with the July payrolls report and its infamous revisions sparking the quick turn. But that soft report didn’t happen in a vacuum, as both ISM reports also printed soft (services were just 50.1 in July) and continuing jobless claims have climbed to the highest in almost four years. To be sure, the consumer isn’t rolling over as auto sales were solid last month at 16.9 million a.r.; but, that resiliency will be tested as hefty tariffs are gradually passed on. Adding some spice to the bland economic mix is the sudden replacement of a relatively hawkish Fed governor with a presumably dovish substitute (see below). When combined with oil prices near $64, the odds of a Fed easing in September have soared to above 90%, and there are full expectations of at least one more move in 2025. At the end of July, or 8 days ago, many were openly doubting that there would be even one cut this year. We have been steadfast in our view that the Fed will resume cutting in September and will move 25 bps every quarter until the end of 2026, taking the funds rate to just below 3%, or just below neutral. However, given the coming change in the Chair position next spring, things may not be that neat and tidy. The massive shift in Fed rate expectations has spilled over into the Bank of Canada outlook, despite the plain fact that the BoC has very much carved its own path in the past year. That minor detail aside, the prospect of fast and/or furious Fed cuts has revived talk of BoC trims. Those odds got a shot in the arm from a weak Canadian employment report for July (-40,800), which acted as a heavy counterweight to the shockingly strong result the prior month (+83,100). Combined, the two months made some sense, albeit the net average job gain of just over 21,000 is resilient, especially since manufacturing jobs managed to rise in both months. But, bigger picture, the trade uncertainty lingers, and this follows a nasty 31% a.r. plunge in real exports in Q2, yielding the largest quarterly trade deficit on record. Even if the Canadian economy stumbles, the BoC will need convincing that core inflation is ebbing. Wages were neutral in the jobs data, ticking up to 3.3% y/y, but in an acceptable range and well below the 5%+ pace in mid-2024. The softness in energy prices will help, both on headline inflation, as well as the more subtle effect on food costs and even some core areas. OPEC’s decision to keep ramping production is offsetting concerns about a tightening of sanctions on Russian oil, and quietly strengthening the case for rate cuts by both the Fed and the BoC. Finally, note that as much as the BoC wants to be independent from the Fed, we now know that the next six decision dates are on the same day as the FOMC. Just sayin’. At the same time, much of the rest of the world remains in rate-cutting mode, even if the pace is slowing. This week alone brought 25 bp cuts from the Bank of England (albeit barely) and the Bank of Mexico. The common refrain has been how well the global economy has managed through the trade turmoil, at least so far. But a theme through earnings season was how many companies were initially eating some tariff costs, especially in the auto sector. Here’s guessing that those costs will be slowly, but surely, passed on, putting a bit more downward pressure on spending but also some upward pressure on inflation. The crucial question for central banks will be: Which force is stronger? The bias here is that growth will carry more of the weight. On that front, the key report for the coming week is Tuesday’s U.S. CPI, which is likely to show a small pick-up in core to +0.3% m/m and 3.1% y/y. A little inside baseball for the dog days of summer: We normally publish this piece and Focus in the early afternoon on Friday since—rumour has it—not everyone stays keenly focused on emails et al. late on the last day of the week. Of course, this early-bird schedule always carries some risk that a major market development or shift will unfurl late Friday, rendering our report a tad stale. For instance, sometimes minor market selloffs on Friday morning can morph into five-alarm fires by 4 pm (e.g., the week of Liberation Day). But major events typically unfold only about once or maybe twice a year on Friday afternoons. Unfortunately, last Friday was one of those occasions. |
Within minutes of publishing last week, word came down from on high that the head of the BLS was being summarily exited from their job. And seemingly moments later, Fed Governor Adriana Kugler decided to return to the relative quiet of Georgetown University, leaving a juicy seat open on the Fed Board. Piling on to a jobs report that was doing a slow burn through markets, as the full weight of the weak revisions sunk in, and suddenly we had a raging inferno for rate cut expectations on our hands by the end of last week. After holding in a relatively tight range for a month, 2-year Treasury yields dove 25 bps in a single session to just below 3.7% (they nudged back up 6 bps this week—at least unless another Fed Governor decides to move on this afternoon). |
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So, just since we left you a week ago, Kugler has stepped aside and her replacement has already been announced. President Trump picked Stephen Miran, the head of the Council of Economic Advisers, as a short-term fill-in until Kugler’s term expires on January 31, 2026. Either this position will re-open, and/or Jay Powell may decide to step down from his position on the Board when his term as Chair expires in May (his Governor term doesn’t end until 2028, and there is precedent for a retiring Chair to stay on, albeit it’s only happened once). And, we have quickly gone from having the “two Kevins” as the front-runners to replace Powell, to Governor Waller taking the pole position (per betting markets). But that’s this week, and life moves pretty fast. Meantime, there’s no news yet on who will permanently run the BLS… and, hands up, how many knew the name Erika McEntarfer a week ago, outside of family, friends and deep-state economic nerds? Former staffer, William Wiatrowski, is now acting commissioner, and potential future Jeopardy! answer. Whoever gets appointed will need to be confirmed by the Senate. We’re not going to prejudge what this will mean for U.S. economic data in the future, and one could easily make the case that some reform at the BLS was needed given the deep decline in survey response rates. But, since this institution is responsible for both the employment report and consumer prices—both sides of the Misery Index—we are going to hazard a guess that stagflation risks have just been dialled back a notch—at least according to the official data. |