On Monday, markets showed a buying-on-dips trend: US and European stock futures rose, as did the dollar. The Japanese Nikkei index responded with a delay to Friday’s Wall Street decline and yen strengthening, while most other Asian markets posted better results.
At the start of trading, Fed rate futures priced in a 65 basis point rate cut by December, but this later decreased to 60 bps. This is still significantly higher than the 33 bps priced in before the Friday report on weak US employment growth. The probability of a rate cut in September remains at 83%.
Friday’s 25 bps drop in two-year US Treasury yields indicates that markets have already priced in a rate cut. The cost of borrowing in the US is largely influenced by bond yields rather than the official rate.
The 10-year Treasury yield also fell by 14 bps but encountered technical resistance around 4.20% — a level it has struggled to break below convincingly since last October.
The gradual slowdown in wage growth calls into question the US’s position as a global economic leader and the dollar’s status as a “reserve currency.” Confidence in the dollar further weakened after President Trump dismissed the head of the Bureau of Labor Statistics (BLS) — an institution known for its impartiality trusted by investors worldwide.
Trump said he would soon appoint a new BLS chief. But will this be an independent statistician providing objective data, or a loyal official catering to the political leadership?
US assets have traditionally enjoyed a “trust premium” that will be hard to maintain if Trump continues to centralize control over state institutions.
Moreover, Trump proposed using part of the tariff revenues to pay so-called “dividends” to a select group of US citizens, likely via special checks bearing the TRUMP logo. Thus, anyone buying imported goods effectively pays an additional tax, which is then redistributed to chosen individuals — not on behalf of the government, but supposedly personally by the president.
On Friday, the US Court of Appeals reviewed the legality of Trump’s “reciprocal” tariffs. The court seems inclined to uphold a previous ruling that these tariffs are illegal.
However, even if that ruling is upheld, it will likely be appealed to the Supreme Court, which often supports broad interpretations of presidential powers. If the tariffs are deemed illegal, both current and concluded trade agreements may be canceled, and a path may open for the return of billions of dollars collected as duties.