It’s been a busy week as we embrace the return of increased newsflow after the summer break and contend with the joys of ‘back to school’, London tube strikes and a return to darker mornings.
Judging by the weather, autumn is very much with us, but financial markets remain in positive mood, as expectations for interest rate cuts are emboldened by softer US labour market data and inflation numbers that continue to show a limited impact from the US tariffs.
We have seen significant revisions to the US labour market data this week, which casts a slightly different narrative on the health of the US economy. In addition, last Friday’s non-farm payrolls report for August showed an increase of 22,000 jobs, some way below expectations of 75,000. Revisions to prior months data showed that payrolls in June shrank by 13,000, the first negative payrolls print since December 2020. It was the sixth time in the past seven months that historical payroll revisions have been negative. This week the Bureau of Labour Statistics published revisions for the twelve months to March 2025, with a total reduction of 911,000 jobs. The revisions show the US labour market to have been softer than previously thought, reducing payrolls between April 2024 and March 2025 by around 75,000 a month, with potentially some negative payroll months within that date range. The final numbers will be published in Q1 2026, by which time the narrative around the labour market could be very different. The US labour market is clearly relatively soft but for now a lack of hiring has not turned into outright firing and significant layoffs. Both demand and supply are on the wane, which could keep the labour market relatively tight with it potentially not loosening as fast as previous cycles due to the slowdown in supply as a result of lower migration into the US. Treasury Secretary Scott Bessent said the Federal Reserve should “recalibrate” policy in the light of the revised data, adding that President Trump is “right to say the Fed is choking off growth with high rates”. Meanwhile, President Trump posted that Fed Chair Jay Powell “is a total disaster, who doesn’t have a clue”. The recent narrative of a cooling labour market looks slightly outdated in the light of the new information; the data now suggests the labour market has been soft for quite some time.
Yesterday saw the US publish inflation data for August, with CPI climbing by 2.9% year on year, in line with expectations and up from 2.7% in July. Within the data, there remained limited pass through from tariffs, with the pressure more from services, more specifically airfares, and from shelter costs. The data did little to change expectations for a rate cut from the Federal Reserve next week, and further cuts beyond assuming the labour market remains soft and inflation remains relatively contained. Market expectations for rate cuts are close to pricing three successive cuts by the end of 2025, with 74 basis points of cuts expected by December. This is the highest level since May, a time when tariffs were dominating the headlines and recession talk was elevated. While tariffs may have fallen from the headlines the Fed’s ‘Beige Book’ of regional surveys suggest companies are still getting to grips with tariffs and are figuring out how to absorb them or pass them on. It may be a little premature to conclude that tariffs will not show up in the inflation data, but it would appear companies are not yet in a position to pass prices on.
There’s been plenty going on this week in politics, with both France and Japan seeing their Prime Ministers stepping down. In Japan, Prime Minister Shigeru Ishiba resigned his leadership of the Liberal Democratic Party (LDP) and will step down once a new leader, and therefore Prime Minister, is chosen. The move was widely expected in the aftermath of losing the Upper House parliamentary elections in July which followed on from losing the Lower House in October 2024. The leadership contest should begin shortly and conclude in early October. While the new party leader will assume the role of Prime Minister, they will still need to be confirmed by Parliament; this is normally a formality but there are risks this time due to the LDP’s lack of majority. A general election remains a possibility given the fractured state of Parliament and policy gridlock given the LDP’s ruling coalition has been struggling to pass legislation. Two main contenders are being floated – the conservative Sanae Takaichi and the more moderate Shinjiro Koizumi. If that surname sounds familiar, it is – Koizumi is the son of former prime minister Junichiro Koizumi.
In France, Prime Minister Francois Bayrou, as expected, lost a confidence vote. Bayrou called the vote ahead of putting his 2026 budget before parliament, arguing a vote was needed to forge a political consensus over his view that the national debt was a “grave problem requiring an urgent response”. Bayrou said that negotiations over specifics in the budget should only begin after the confidence vote, an approach deemed unworkable by the opposition. In losing the vote by 364-194 in the National Assembly, Bayrou’s nine-month tenure has come to an end. Bayrou staked his premiership on parliamentary support for his deficit cutting efforts – a €44bn package of spending cuts and tax increases as well as scrapping two public holidays. French President Emmanuel Macron named Sébastien Lecornu as the new Prime Minister. Lecornu has been defence minister since 2022 and has served in all of Macron’s governments since 2017. Lecornu is expected to have to water down the budget proposals of ousted PM Francois Bayrou to secure the approval of a divided parliament that has brought down two Prime Ministers in less than a year. Lecornu is the fifth prime minister in the past two years but appointing a new PM was the ‘least bad’ option compared to parliamentary elections, a big risk given the popularity of the right-wing National Rally party of Marine Le Pen. This week saw a day of nationwide protests co-ordinated on social media aimed at bringing the country to a standstill, while next Thursday will see a trade union organised day of regional and national strikes. Meanwhile, Marine Le Pen will face a retrial next January as she seeks to overturn a conviction and election ban after she was found guilty of misusing EU funds. The trial will take place between 13 January and 12 February with a decision by the summer.
Talking of court decisions, we also learned this week that the Supreme Court will hear arguments over the legality of the tariffs invoked by President Trump under the International Economic Emergency Powers Act (IEEPA) in November. The hearing comes as a result of the Trump Administration appealing the ruling by the Federal Appeals court at the end of last month that upheld a lower court’s ruling back in May that deemed tariffs applied under IEEPA to be illegal and beyond the authority of the President. What it means in reality is that while tariffs may have fallen away from the headlines, the uncertainty for companies and importers continues for at least two more months….
Source: Columbia Threadneedle Investments as at 12 September 2025.
