In my last note, we talked about the setup going into the jobs report.

It looked very similar to the jobs report of a year ago (July 2024):  Inflation in the mid-2s, the job market showing “cracks,” and a Fed stubbornly holding policy too tight.

Like last July, we got a negative surprise this past Friday.

Like last July, we got negative revisions.

And like last July, we got a breakdown in stocks.

And like last July, the short end of the interest rate market (2-year yields) repriced (lower) by 25 basis points, conveying the message to the Fed that, once again, it made a policy mistake.

But we get a bounce back in stocks today, for the reasons we’ve been discussing over the past month.

Those reasons:  The Trump administration has effectively diminished the voice of the Fed, by elevating a “shadow Fed” — a lineup of Trump-aligned Fed Chair candidates that have already openly signaled future monetary policy to markets (i.e. significant easing).

Let’s talk about the revisions …

See the bold numbers in the table above:  Not only did the July payroll number undershoot expectations, the prior two months had huge downward revisions.

What’s all the fuss about?

The Bureau of Labor Statistics (BLS) has overshot job growth on its initial report seven consecutive months — nearly half a million jobs.

The result has been, fiscal and industrial policy with a foot on the gas pedal, and monetary policy with a foot on the brake pedal.

Is this just coincidence that the revisions have been in one direction, and that the initial reports have served as a headwind to the Trump administration?  Or is it political?

To answer that, let’s revisit the analysis we’ve done on this topic.

As we’ve discussed over the past four years, the Biden BLS had a record of making large revisions in the jobs data which led to very consequential misreads on the health of the economy by policymakers.

Here’s a look at 2021 … 

We get the Fed tomorrow.

Despite the Trump pressure campaign of the past month, the interest rate market expects no change on rates.

If that’s the case, we should get two dissenters.  Remember, over the past month, two voting Fed members have said they favor a rate cut at this meeting — both of which are voices respected by the Fed Chair (Powell).  

It was Bowman’s big speech last month that revealed the Fed’s plan to finally reform the bank leverage ratio rule that has been distorting liquidity, and creating unnecessary liquidity risk in the U.S. Treasury market.  In the same speech, she said: “should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting.”

A few weeks later, fellow Fed Governor Chris Waller delivered a speech titled, “The Case for Cutting Now.”

He went further, in an interview on Bloomberg to openly admit that the Fed hasn’t followed “the data,” and instead has been (his words) “on pause for six months thinking that there was going to be a big tariff shock to inflation” — a view Waller called counter to economic theory.

So, could these two nudge Jerome Powell to their side, which would likely mean a cut?  

In the Bloomberg interview, Waller also referenced the July 2024 meeting (last year), implying the Fed’s mistake for stubbornly leaving rates unchanged (at historically high real rates) for a twelfth consecutive month. 

And that meeting came just days after the Bank of Japan took another step toward exiting its role as the global liquidity provider, by raising rates for a second time since 2007 — and they signaled more to come.  

The Fed had an opportunity to counter market fears of tightening global liquidity, by beginning an easing cycle.

In the press conference, Jerome Powell even made a good case for why they should have cut. 

But as Waller said, they didn’t.

Two days later, we got a weak jobs report.  We got a break down in stocks — a plunge of 8% over three days in the S&P.  And we had one of the sharpest declines in Japanese stocks on record, and an unraveling of the carry trade.  And by September, we got the 50 basis point cut from the Fed.

So, we have another jobs report this Friday.

And over the past two years, the Fed has consistently identified “cracks” in the job market, as their stated condition to “react” (in Jerome Powell’s words) with a policy response.

With that, Waller said in his Bloomberg interview, the job market, “underneath the surface” is not doing well. 

And he used the analogy of walking on ice — he said, “when you start hearing cracks … it’s too late.”

With all of the above in mind, we know Jerome Powell should be highly sensitive to the phrase “too late.”

With back-to-back trade deals now signed with Japan and Europe, Trump has officially reset global trade. 

The question is, why would two of the largest economies in the world agree to what appears to be very lopsided deals?

Because the alternatives are worse. 

Trump is selling access to safety (security guarantees), stability (the dollar and U.S. capital markets), and markets (consumers).  The U.S. still has a monopoly on these three levers of stability and prosperity.   

So, this is the “burden sharing” strategy laid out in a paper written by his top economic advisor, Stephen Miran, back in December (which got him the job).

In this case, the dollar’s role in the world as the reserve currency provides benefits to the world, and benefits to the U.S. but also drives persistent unsustainable U.S. trade deficits (a burden).

These trade deals are bringing trade partners into a new system of sharing the burden along with the benefits.

Still, these deals aren’t as one-sided as they look. Miran’s paper makes the case that tariffs don’t hit consumers if the exporting country’s currency absorbs the blow (i.e. a weaker currency). 

China did this in Trump’s first term.  They devalued the yuan almost one-for-one with the tariffs.  It keeps their businesses competitive, but the hit comes to their global purchasing power and real wealth.

The euro and yen are already weakening, post-trade deal, and both Europe and Japan have substantial dollar commitments now, which they will need to be hedging (a drag on both currencies).     

This is realigning the world and rebalancing global trade. 

What’s the alternative for U.S. trading partners?  Align with China and get consumerism through debt enslavement, deindustrialization, gutting of industries, dependency — and vulnerability (no security).

This begs the question, now that Europe and Japan are off the table, what cards does China hold in negotiating with the Trump team today?  

They’ve seemingly lost a lot of leverage. 

Have they been boxed in?  And how might they respond?