Treasuries Welcome Prospect of Fed Cuts

For the week ending 5 September 2025

As of midday Friday, global equities slipped back from near-record level as markets priced in at least a 25 basis point rate cut from the US Federal Reserve in mid-September. The yield on the US 10-year note tumbled 0.16% to 4.07% from a week ago after the data, while the price of a barrel of West Texas Intermediate crude oil slumped $2.75 to $61.75. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), edged up to 17.2 from 16.3 last Friday.

MACRO NEWS

Weak US jobs report cements September Fed cut

US nonfarm payrolls rose 22,000 in August, well below the consensus forecast of a 75,000 job gain. Over the past three months, nonfarm payrolls have averaged a gain of only 29,000. The unemployment rate rose to 4.3% from 4.2% the month before. Growth in average hourly earnings slowed to 3.7% year-over-year from 3.9% in July. After revisions, June’s nonfarm payrolls now stand at -14,000, the first negative print since December 2020. Odds of a quarter-point rate cut from the US Federal Reserve on 17 September were close to 100% before the data. After the figures, odds of a half-point cut rose to 17%, according to futures markets. Given the markets’ focus on the labor market, next week’s benchmark revisions to the employment data may overshadow the August CPI report. Bonds continued the rally that started at midweek, dropping the US 10-year note yield to a low of 4.06%, the lowest level since the day after Liberation Day.

Tariff Case Heads to Supreme Court

In a 7-4 ruling, the US Court of Appeals for the Federal Circuit found late last Friday that US President Donald Trump lacks the legal authority to impose tariffs under the International Emergency Economic Powers Act. The court left the tariffs in place, however, while the case is appealed to the Supreme Court. Trump asked the court to expedite his administration’s appeal, saying that recently negotiated trade deals could unravel if the case is not adjudicated quickly.

Miran intends to return to White House

White House Council of Economic Advisers Chair Stephen Miran testified in Thursday’s hearing on his nomination to serve briefly on the Federal Reserve Board that monetary policy independence is critical for the Fed. He said he will make policy decisions based on his reading of macroeconomic data and that he has not been told how to vote. Miran further said he has been informed by lawyers that he can take an unpaid leave from his White House post while serving temporarily on the Fed Board, avoiding a second Senate confirmation hearing if he returns to the CEA early next year.

QUICK HITS

Global purchasing managers’ indices mostly firmed in August.
 

The US Job Openings and Labor Turnover Survey showed that job openings declined to 7,181,000 in July from 7,437,000 in June, a continuation of recent softer labor market.

US nonfarm productivity was revised up to a 3.3% annual rate in Q2 from 2.4%, lowering unit labor costs to a gain of 1% from 1.2%.

Fed Governor Christopher Waller repeated that he thinks the Fed should cut rates at its September meeting and said tariffs aren’t going to cause inflation over the long run. Most surprisingly, Waller, a candidate to replace Jerome Powell as Fed chair, said that tariffs are a tax and that they will lead to slower economic growth this year, an acknowledgement that is unlikely to endear him to the White House.

New York Fed President John Williams said Thursday that he is not seeing second-round effects from tariffs and that he is not expecting tariff-driven inflation to be persistent. He expects the US economy to grow between 1.25% and 1.5% in 2025 while he sees inflation running in a range between 3% and 3.25%.

Inflation in the eurozone ticked up to 2.1% year-over-year in August, while the core rate held steady at 2.3%. Unemployment held steady at 6.3% in July.

President Trump signed an executive order Thursday codifying 15% tariffs on imports from Japan. The agreement between the US and Japan includes $550 billion in funding from Japan to build supply chains in the US at the discretion of an investment committee headed by US Commerce Secretary Howard Lutnick. If the investment funding is not forthcoming, US tariffs will snapback to prior levels.

With summer holidays over, a record €49.6 billion in bonds were issued in Europe on Tuesday.

The Fed’s Beige Book showed that most of the 12 Federal Reserve districts reported little or no change in economic activity since the prior report.

Under a scenario where Fed independence is damaged, gold could reach $4,500/oz by mid-2026, according to analysts at Goldman Sachs. The firm estimates that if only 1% of the privately held funds in US Treasuries were to flow into gold, the metal could reach $5,000/oz.

On Thursday, the US Department of Justice launched a criminal probe into Fed Governor Lisa Cook’s mortgage dealings.

The Wall Street Journal reported Friday that the Trump administration will begin public consultations on the renegotiation of the US-Mexico-Canada Agreement within the next month. A trilateral review of the pact is due by 1 July 2026.

The Canadian economy shed 65,500 jobs in August, pushing the unemployment rate up to 7.1% from 6.9% in July. Odds of a rate cut at the September Bank of Canada meeting rose to 8% from below 60% before the data’s release.

THE WEEK AHEAD

Monday: Japan GDP

Tuesday: US employment data benchmark revisions

Wednesday: US PPI

Thursday: ECB meeting, US CPI

Friday: Japan industrial production, UK industrial production 

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.