Markets to Test Fed Signals and Global Risk Appetite as Jobs, Tariffs, and French Politics Take Center Stage
Expect a session driven by data and policy expectations as markets open. The recent U.S. jobs numbers have left investors with conflicting evidence about the economy and about central bank policy. That uncertainty is likely to produce outsized reactions in interest rates, currency pairs, and select equity sectors during the coming trading day.
Last week’s employment readings showed a clear slowdown after a stronger start to the year. Employers averaged 123,000 payroll gains per month in the first four months, but job creation has nearly stalled since May, averaging roughly 27,000 per month and including the first monthly decline in over four years. At the same time unemployment remains a comparatively low 4.3% and weekly initial jobless claims are still subdued. GDP tracking from the Atlanta Fed points to roughly 3% annualized growth in Q3. Those mixed signals are the core of the market story. Strong GDP tracking and low unemployment argue for continued resilience, while the stop in job growth and manufacturing contraction point to slower momentum ahead.
Tariff policy is an underappreciated driver of market behavior right now. Tariffs have been raised to levels not seen in most Americans’ lifetimes and are generating roughly $30 billion a month in implicit taxes that fall on importers, consumers, and international suppliers. Businesses that rely on global supply chains are already feeling pressure. The Institute for Supply Management reported that manufacturing contracted for the sixth straight month in August and that survey comments highlighted supply chain stress tied to tariff policy. Such cost pressures can push inflation up even as growth cools, complicating the outlook for monetary policy and corporate profit margins.
Fiscal policy adds another layer of complexity. Tax legislation enacted in July was aimed at stimulating supply side investment and included border security spending and household tax reductions. Those household measures will function as demand stimulus in the months ahead. At the same time, political decisions around immigration, including increased deportations and tighter restrictions, are shrinking the labor pool and reducing demand for goods and services that immigrant households buy. Fewer workers combined with slightly lower demand in certain local markets may be part of the explanation for the recent flatlining in job growth.
The Federal Reserve has resisted interest rate cuts for much of the year because tariff-driven inflation risk remained an important consideration. The recent weak payroll updates suggest the Fed may be closer to easing than markets anticipated a few months ago. If traders push short-term interest rate expectations materially lower in response to a view that the Fed will relent, Treasury yields could move sharply down and growth-sensitive assets could react. Conversely, if investors focus on tariff-driven inflation and the persistent strength in unemployment and GDP tracking, yields could rise on fears that policy will remain restrictive longer.
European developments will also be a headline force. France is at the center of an acute fiscal and political confrontation that could have wider market implications. The French government ran a deficit equal to 5.8% of GDP last year, the widest in the euro area and nearly double the European Union’s target. The prime minister proposed a package of measures intended to reduce the gap to 4.6% of GDP by 2026. Those measures would include eliminating two public holidays and broad cuts to social welfare programs alongside tax increases. The proposal has prompted a strong political backlash and a likely vote of no confidence.
Investor reaction has been visible in French government debt. Yields on 10 year French bonds have backed away from German Bunds by the largest margin seen this year, signaling that markets are demanding higher compensation for perceived sovereign risk. The head of the European Central Bank has publicly noted a recent uptick in risk tied to events in France. If the political process forces a retreat from fiscal tightening or produces a succession of unstable governments, European borrowing costs may face further upward pressure. That would feed through into broader euro area risk premia and could weigh on European equity markets and on financials with exposure to sovereign bonds.
Putting these pieces together, the immediate market calculus comes down to how traders price the tug of war between growth, inflation, and policy. Faster inflation expectations would support higher bond yields and stronger dollar performance. A clear move toward Fed rate cuts would push yields lower, lift risk assets and potentially weaken the dollar. The French story could produce localized volatility in European fixed income and equities and could momentarily reroute global risk sentiment depending on whether markets view the crisis as manageable or as a sign of deeper fiscal fatigue among developed economies.
Sectors are likely to react unevenly. Exporters and manufacturers that rely on imported inputs face margin pressure from tariffs and supply chain disruptions. Consumer discretionary and retail names tied to immigrant demand may see softer trends in regions experiencing immigration enforcement. Financials will watch the moves in bond yields closely because of the implications for net interest margins and loan demand. Technology and venture related names carry a separate dynamic. Venture capital flows have concentrated heavily in artificial intelligence themes, with nearly half of 2024 investment going into AI according to recent market reporting. That concentration has helped fuel a recovery in deal activity, but many VC backed companies remain lean with roughly half having less than a year of cash on hand. That combination can create rapid winners and rapid restructurings depending on financing conditions and revenue trajectories.
For traders and investors the prudent approach for the coming session is to monitor three crosscurrents closely. First, watch any updates to Fed rate expectations and Treasury yields in response to the labor market data. Second, follow European bond spreads especially the French 10 year over German benchmarks for signs of widening stress. Third, track corporate guidance and sector level responses to tariff costs and to the mix of fiscal measures now in motion. Those indicators will drive short term positioning across equities, fixed income, and currencies.
Volatility is a likely companion to these developments. The policy forces at work are powerful and operate on different timelines. That makes forecasting unusually hazardous. For traders this argues for careful sizing, tighter risk controls and flexible responses to incoming data. For longer term investors it suggests focusing on fundamentals and cash flow resilience rather than chasing one day moves. Markets will test how well companies and governments can absorb higher trade costs while growth cools and borrowing costs remain uncertain. Expect a session where headlines carry outsized influence and where pricing adjusts quickly as participants absorb new information.
Overall prepare for a trading day that will react strongly to the interplay between the recent U.S. employment slowdown, tariff driven inflation risk, Fed policy expectations and the French fiscal standoff. Those themes will be the primary drivers of cross asset moves and will define risk and opportunity during the session.
