A Change in Market Perception
Published 8/2/25 – Following the release of significant economic data this week the financial market players have changed perception. Before this morning there was a consensus that the Federal Reserve (Fed) would likely not lower the Fed funds rate at the next meeting of the Federal Open Market Committee (FOMC). Following the release of the Employment Situation Report (Jobs Report) Friday morning, combined with other economic news this week, that perception has changed.
On Wednesday of this week, Jay Powell, Chairman of the Fed, announced that the Fed would hold the Fed funds rate constant. His support for that decision was based on the relative strength of the economy and uncertainty as to the potential effect of tariffs on inflation.
There recently has been data to show that the economy and employment have been slowing down. In Q1, GDP was slightly negative. In addition, new jobs added has slowed in the past several months. But the Fed did not believe that such information warranted a reduction in short-term interest rates for fear that such an action would over-stimulate the economy.
Friday morning, the Jobs Report showed new jobs in July were under 100,000. In addition, new jobs previously reported were reduced by close to 250,000. That is clear evidence that job growth is slowing.
In addition to the Jobs Report, other recent reports have cast doubt about the economic future. Earlier this week, GDP was reported to have grown by 3% in the latest quarter, but much of the growth was due to a reduction in imports following significant pre-buying in the prior quarter. Then, Thursday night, Amazon gave a gloomy outlook for the upcoming quarter. That creates doubt about the technology sector that has led markets higher.
The culmination of this information has changed the perception of most market participants. Prior to the Jobs Report, bond yields indicated less than a 40% probability that the Fed would lower the Fed funds rate in September. Now that probability has been raised to over 80%.
More importantly, the yield on the 10-year Treasury rate has dropped by about 14 basis points (or 14/100 of 1%) from 4.36% yesterday to 4.22% today. As you can see from the following six-month daily chart, the 10-year rate dropped precipitously yesterday and is near the low of the last four months. If the rate drops below the recent low of 4.21% and holds below, then it is likely that it will move back toward the low of the past six months near 3.90%. That would be a material drop from the recent high of 4.63%
