Market expert Ajay Bagga highlighted that for months, global markets held firm except for the turmoil from April 2nd to April 9th. Wall Street shrugged off Trump’s tariff salvos and the Fed’s hawkish “higher for longer” stance.
“The working assumption: the US economy would absorb it all.
Friday ended that narrative.
Asian markets were down.
European markets had the worst day since April.
US markets say the Big Tech stocks narrowly holding up the markets fall, with Magnificent Stocks like Amazon down 8% at one point.
Confidence cracked with the US July jobs report,” Bagga said.
Payroll growth slowed sharply.
Revisions to prior months shaved off 258K jobs.
The signal: labour market momentum is decelerating, not just softening.
The Non-farm payrolls report sees revisions, as corporates are late to report the data.
This time the revisions were sharply lower for the last two months.
President Donald Trump got some bad economic news Friday, and responded by shooting the messenger.
Trump decided to fire the US labour statistics boss after the weak jobs report.
The President said he will replace Bureau of Labor Statistics head with ‘someone much more competent and qualified’
The US public statistics represent the gold standard. Calling them into question because they tell you something you don’t like undercuts market confidence.
Markets obviously did not like this.
Geopolitically tensions were up.
Donald Trump has said that he has deployed nuclear-capable submarines to the “appropriate regions” in response to a threatening tweet by Russia’s former president Dmitry Medvedev.
Medvedev had earlier said that Trump’s threats to sanction Russia and a recent ultimatum were “a threat and a step towards war”.
In a post on Truth Social on Friday, Trump wrote that he had decided to reposition the nuclear submarines because of “highly provocative statements” by Medvedev, noting he was now the deputy chairman of Russia’s security council.
“I have ordered two Nuclear Submarines to be positioned in the appropriate regions, just in case these foolish and inflammatory statements are more than just that,” Trump responded. “Words are very important, and can often lead to unintended consequences, I hope this will not be one of those instances.”
The markets made a note of this but were not overly bothered as US submarines are anyways within range of striking targets around the world at any time.
This was seen as a rhetorical threat. For now.
Bagga said, “In the meantime, the Bond markets reacted swiftly.
2-year US Treasury yields dropped a sharp 18 bps to 3.68%, their sharpest fall since Dec 2023.
This was a flight to safety, but also a repricing of the Fed’s reaction function.
The market mood shifted dramatically: after months of optimism driven by strong tech earnings, today delivered a sharp “reality check.”
The pullback in stocks marked a sharp reversal for markets that had raced to record highs on the back of resilient economic growth, signs of cooling inflation, and a frenzy for AI-linked shares. With valuations elevated, traders are now confronting a harsher backdrop amid renewed debate over how quickly the Fed might be forced to cut rates.”
The debate now is whether the White House was right, and the Fed was too late to cut. The Fed was probably right to wait, but job growth and the economy is slowing from a blistering rate.
And rate cuts take 9 to 12 months to transmit into the broader economy. So, the Fed may already be late.
On the other hand, with hourly changes in tariff rates, and the tariff impact not having flown through to consumer prices as yet, the Fed is right in holding back till the inflation picture is clear.
The Yale Budget Lab forecasts that US Consumers face an overall average effective tariff rate of 20.2%, a 17.8% increase from 2024 & the highest since 1911.
After consumers & businesses shift spending in reaction to the tariffs, the average tariff rate will be 19.3%, a 16.9% increase & the highest since 1933.
The actual impact on US consumers is also estimated by the Yale Budget Lab.
The price level from all 2025 tariffs rises by 2.0% in the short-run, the equivalent of an average per household income loss of $2,700 in 2025$, assuming no Federal Reserve reaction.
The post-substitution price increase settles at 1.7%, a $2,300 loss per household.
That is a huge hit especially to lower and middle income earners for whom higher inflation is a steep tax.
Tariffs are a regressive tax, impacting the lower income strata much more as consumption gets curtailed by higher landed prices. This has an impact on actual GDP, corporate earnings and before it happens, on stock market valuations.
That process may have started. As per the estimates of the Yale Budget Lab, US real GDP growth over 2025 could be -0.8% lower from all 2025 tariffs.
In the long-run, the US economy could be persistently -0.4% smaller, the equivalent of $135B annually in 2024$.
The unemployment rate could rise +0.4% by the end of 2025, & payroll employment could be -594,000 lower.
With the last three months’ job growth averaging 35,000, this process may already be on.
Meanwhile on Friday, Equity markets recoiled.
The S&P 500 notched its worst week since May.
Momentum names gave up gains.
Safe-haven flows re-emerged.
Volatility-absent for months-came roaring back.
The “bad news is good news” trade flipped.
This was genuinely bad news:
→ Slowing growth
→ Persistent tariffs
→ Elevated rates, high debt, high interest payment burden and high fiscal deficit
→ No clear policy relief in sight.
Overlay this with Trump’s latest tariff escalation.
A sweeping round of duties imposed on Aug 1 added new weight on global trade flows.
Protectionism is no longer noise-it’s macro policy.
Global Markets are now confronting twin tightening:
→ A weakening domestic economy across the world
→ An externally-imposed supply shock via tariffs.
This is Stagflationary risk-not seen since pre-COVID days.
Chair Powell is now in the spotlight.
Expectations for a September rate cut surged.
Markets are signalling: “If the Fed doesn’t act, downside risk will accelerate.”
The dollar softened.
The DXY index fell as traders recalibrated rate expectations and sought shelter in yen and Swiss franc.
Currency markets are often the first to pick up regime shifts.
In equities, the rotation was clear:
→ Growth underperformed
→ Cyclicals dropped
→ Defensives and dividend payers saw relative support
Risk-off mode was broad-based, but still discriminating.
Job creation is at stall-speed, and the tariff overhang may tip payrolls into contraction. That’s recession territory.
Markets are no longer pricing in just volatility-they’re pricing in fragility.
The VIX jumped.
Credit spreads widened modestly.
Treasuries rallied across the curve.
These are classic signs of a market reassessing its prior complacency.
The post-earnings rally in Big Tech faded.
Even Amazon’s strong numbers couldn’t insulate it from macro headwinds.
When sentiment turns, even leaders get repriced.
We’ve entered a regime of uncertainty:
→ Political risk is no longer background noise
→ The Fed’s margin for inaction has narrowed
→ The market’s tolerance for weak data is fading
September rate cut becomes a big possibility from the US Fed.
There is a good chance that US markets shrug off Friday and focus back on AI based growth and the massive liquidity globally.
Or maybe this is a first turn down. Only time will provide clarity, concluded Bagga.