US labor market and tariff cancellation dominate the economic scene

Last week was conclusive for the global economy, especially in the United States, which included very sensitive economic releases. One such release was the Personal Consumption Expenditures (PCE) index—the Federal Reserve’s preferred gauge—just ahead of its upcoming meeting.

Global Markets React to US Labor Market Slowdown and Tariff Uncertainty

Despite some indicators rising, like consumer spending and services inflation, interest rate expectations remain dovish as key market indicators signal a labor market slowdown and an estimated rise in unemployment.

As for Europe, challenges persist. German inflation came higher than expected, which in turn might have an effect on the European Central Bank’s (ECB) next interest rate decision. However, current low interest rates drove lending growth, with the economic growth expectations in the EU remaining relatively stable, all the while working on minimizing the effects of US tariffs.

In Asia, volatility was the name of the game. In Japan, the unemployment rate showed some recovery with trade ties strengthening with India. Meanwhile, China moves closer to Russia and India to combat challenges it faces on the American front.

The Chinese market keeps its positive momentum, as the government’s efforts on the AI front and limiting the country’s reliance on American corporations start to show results. All the while, awaiting a new deal with Washington.

Key takeaways:

• A conclusive week for the US labor market.
• US Court of Appeals cancels tariffs imposed by Trump.
• Japan strikes a promising deal with India
• News of Chinese delegates arriving in Washington for trade talks.

Financial markets: US inflation numbers and labor market dominate the scene

First, the US economy:

Last week was unnerving for the US market, especially with key economic numbers released,  particularly inflation data, ahead of the Fed’s mid-month meeting. The PCE rose at its fastest pace in four months this July, and services inflation also ticked higher.

Economists remain steadfast on the current high local demand not affecting the Fed’s dovish stance on the interest rate decision this month. This is mostly due to a weakening labor market, which, according to the report, is a result of the rising services expenses. This was strongly felt in the financial sector—with costs increasing at the fastest pace in five months year-over-year, following a stock market rebound. Volatile food and energy components were excluded.

The US market also witnessed conflicting economic releases last week, with the consumer confidence index slowing slightly at a higher rate than expected. While the second GDP reading confirmed stronger Q2 growth compared to the contraction in Q1.

Consumer spending, which constitutes over two-thirds of the US economic activity, met analysts' expectations of a 0.5% growth rate last month, compared to a 0.4% increase in June.

As for July’s trade balance data, it showed the goods deficit widening to a four-month high of over $103 billion, driven by a rush of purchases ahead of broad tariffs.

As for this week, the US market is in for a diverse set of economic releases. These include the job openings leading up to Friday’s crucial labor report, with unemployment expected to rise to 4.3%—a level that last year sparked fears of recession.

US tariffs’ cancellation shock
In a seven-to-four voting session, the US Court of Appeals announced that many of the newly imposed trade tariffs are unlawful and bypass President Trump’s authority. Nonetheless, the court refrained from executing the order until October 14, giving the government space to backtrack on its tariff policies.

If the ruling stands, the implications could prove significant:

Deepening uncertainty in the US economy.
Complicating trade negotiations with US partners.
Preventing the US from collecting hundreds of billions in tariff revenues Trump had relied on to offset financial damage from his major tax reform, which is set to reduce tax revenues by $2–3.5 trillion over the next four years.
Adding pressure on US corporations that pledged massive investments, such as Apple’s commitment to boost US investment by $500 billion.

Second, the EU economy:

Europe is still battling the effects of high US tariffs while also considering removing tariffs on US goods. Germany, the Eurozone’s largest economy, reported higher-than-expected inflation of 2.1% in August.

In response, analysts expect the heightened German inflation to sway the ECB from a possible interest rate cut in its upcoming meeting this month.

Meanwhile, low interest rates have boosted bank lending in the Eurozone to its fastest pace in two years. Household loans grew by 2.4% in July, the highest since April 2023, while corporate credit grew by 2.8%, the fastest since June 2023.

At a recent ECB survey, consumers in the Eurozone had similar to slightly higher inflation expectations compared to the central bank’s 2% target for July.

Third, the Japanese economy

Last week marked the strengthening of Japan-India trade relations at the 15th annual Japan-India summit, unveiling a ¥10 trillion ($67 billion) investment roadmap covering trade, technology, defense, and Indo-Pacific cooperation—key to bolstering economic security.

On the economic data front, the country’s seasonally adjusted unemployment fell by 0.2 points in July to 2.3%, the first improvement in five months and the lowest since December 2019.

While inflation in Tokyo sharply dropped in August due to government utility subsidies. It remained well above the Bank of Japan’s target, keeping the bank on track for more rate hikes.

Third, the Chinese economy

Chinese policymakers had tightened economic relations with India and Russia amidst US tariff threats. The latest talks included expanding Russian oil imports through an old pipeline, as well as the Sino-Indian cooperation expected to benefit both markets.

The Chinese stock market continued to rally, adding $1.3 trillion in market value last month, with the CSI 300 rising in nine of the past ten weeks. This rise came despite government warnings and interventions by brokers and fund managers to cool the rally.

The country’s authorities pressed firms to reduce reliance on Nvidia chips, in line with the “AI+” plan unveiled this week, which includes higher financial incentives for AI capital investment and deployment.

On trade talks, China’s chief negotiator, Li Chenggang, is heading to Washington this week to meet with US officials as both powers seek a post-tariff truce framework.

Markets are watching the two rivals closely to see if the latest tariff extensions become permanent or if Trump reignites supply chain disruptions with new duties on Chinese imports.
 

Economic calendar following  the US labor market and tariff cancellation

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