Kaboom

Are things starting to break? Mr. Market pondered that question this morning over an iced dirty chai latte, then decided to shed almost 800 points (on the Dow) in the first half-hour of trade. Just in case.

So what happened? Will it last?

First, new tariffs. More of them. Extra Canadian stuff got whacked for 35% while the US president signed an executive order foisting higher taxes on dozens of other trading partners. Once more, businesses and governments were treated to capricious, cavalier Trumpian actions with unknown outcomes. The market hates that.

Then, jobs. Higher tariffs, rising consumer prices, mass deportations – it may all be coming together to cause a deterioration in the American labour market. Job creation last month dropped to 73,000 (economists expected about 115,000), but the real news was a revision in the stats for May and June.

It was epic. In June, for example, an initial claim of 147,000 new hires (which investors celebrated when announced) was crushed down to just 14,000. The three-month average of new hires sank by half. The unemployment rate, although still low, is rising. “Demand for new labor has definitely chilled and some might say it’s now entered a deep freeze on the tariff shock,” says BMO Economics.

“A notable deterioration in U.S. labor market conditions appears to be underway. We have been forecasting this since the tariff and trade war erupted this Spring and more restrictive immigration restrictions were put in place. Overall, this report highlights the risk of a harder landing for the labor market.”

There’s more. Inflation is heating up again. The latest reading this past week is 2.6% in the States, compared with 1.9% in Canada. Blame tariffs, economists say. Prices rose for imported stuff like household furniture and recreation products, and with today’s round of Trump taxes, more increases are anticipated.

This latest news came one day after the Fed decided again not to cut interest rates, the way the White House is demanding. Meanwhile new data showed the American economy is weakening at its core. “The details of today’s report suggest the trade war is taking a bite out of the underlying growth momentum,” writes CIBC economist Ali Jaffery. “Private domestic demand slowed to 1.2%, from close to 2% last quarter and a 3% average pace in 2024… The American consumer is a big part of that slowdown, with consumption growth registering 1.4%, as caution about prices and whipsawing policy is prompting a rethink of spending.”

Hmm. This is a conundrum.

Weakening job numbers and spotty growth. But even higher import taxes and rising prices. What’s the central bank supposed to do? Cut rates to stimulate borrowing, investing and growth? Or hike them to combat inflation before higher costs happen in a tariff-induced swirl?

This is why markets are vexed. Meanwhile the war between Fed boss Powell and the King hangs over everything. Will Trump get his way with a rate plunge in 2026 – goosing growth, asset values and spiking inflation? Doesn’t he always get his way? And since the Bank of Canada follows the US central bank over 90% of the time, are we headed back to 2% mortgages next year?

Fed funds futures were pricing in a 40% chance of a September interest rate cut on Thursday. Today, after the news about tariffs and jobs, that spiked to 81%. Meanwhile bond yields plunged and bond prices jumped as money shifted from equities to safer stuff and investors started looking towards an easing by the Fed.

Politicians always want cheap money, by the way. Voters are debt pigs. They love loading up when rates fall and buying stuff they otherwise could not afford. Never have we had a better example than during and immediately after Covid. Mortgage costs collapsed. House prices soared. Everybody was happy. Until they weren’t.

Well, there you have it. The rate cuts start in a few weeks.

About the picture: “I hope you are doing well. Thanks as always for the daily blog,” writes Eric. “Been a reader for 7 years or so now. If my wife sees me on my phone, she assumes I’m reading something about finance and often times it is your blog. Anyways, here is a picture of our 14 year old Chihuahua. Hopefully he can make the cut and make it on a future post.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/08/01/kaboom-2/