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Markets were blindsided last week – not by economic data, but by the unfolding drama. President Trump’s one-two punch of surprise tariff escalation and the unprecedented removal of the BLS commissioner caught investors flat-footed. Futures wobbled, the dollar reversed sharply, and volatility spiked as traders scrambled to reprice not just the emerging economic outlook, but the credibility of the institutions underpinning it. The tariff announcements came without warning; the dismissal of the BLS chief broke with every norm. This wasn’t just a shift in policy – it was a shift in the rules. And when the rules themselves become unstable, markets demand a higher price for risk.
The global economy has displayed surprising resilience so far. Growth for the second quarter of 2025 is tracking at an above-potential 2.5% annualised rate – more than a full percentage point above earlier forecasts. Much of this strength reflects the glacial pace at which the new wave of tariffs has been implemented. For a while, the threat of protectionism seemed worse than the reality, with front-loaded trade flows and exemptions cushioning the blow. Markets therefore took a breather. But the reprieve is ending. Effective tariff rates are now nudging 20% – a level that, back in April, had markets bracing for the worst. The headline might be that the ‘big one’ with China remains under negotiation, but for global industry, the damage is already materialising.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
The world appears to be up against the worst of both outcomes: slow-burning protectionism that leaves little room for adjustment, and inflation stubbornly centred on the US. While Q2 GDP beat expectations in the US and emerging Asia, the underlying trend has shifted. Consumption is stalling, investment is retreating, and labour demand is weakening. Global manufacturing PMIs have already slipped to a pace consistent with just 0.7% annualised growth. The initial trade shock may have been delayed, but its consequences are now evident. What lies ahead is a global slowdown with inflation that, though uneven, may limit central bankers’ ability to cut rates – especially in Washington.
Regionally, the economic picture is diverging. In North Asia, early strength was driven by tech exports – especially semiconductors – but that support is fading as tariff exemptions lapse and orders slow. Japan’s manufacturers, buoyed by restocking and domestic demand, may see Q3 as a peak, particularly after the LDP’s bruising in Upper House elections.
Europe, meanwhile, is feeling a delayed tariff hit just as momentum ebbs; the ECB’s “good place” narrative is already at odds with weakening industry and fragile consumer sentiment.
In Latin America, Brazil and Mexico face high headline tariffs—partly offset by carve-outs, but still a drag on modest growth. Only India appears more exposed—slapped with a 25% reciprocal tariff just as it pushes for a trade deal with the US. The global economy is still moving—but it’s walking straight into a rising storm.
America just made its data political. The markets will extract a price.
Among the most serious moves of this presidency was the decision to fire the head of the Bureau of Labor Statistics. It wasn’t loud or dramatic, but it struck at something deeper – the trust the world places in US institutions. The BLS has long been a gold standard for independent, reliable data. Markets rely on it. Policy relies on it. The firing, perhaps, was driven by what the administration perceived as “unfavourable numbers”, but the message was clear: data is no longer safe from politics.
The move, however, has global consequences. Investors don’t just buy US assets because of yield – they buy because they trust the rules, the data, the system. Any move that undermines that trust raises risk premiums. If markets doubt the numbers, they will demand higher returns. The cost of US credit goes up. The dollar weakens. Not because the economy is suddenly worse, but because the signal is now unclear.
Whether that is intended or not is open to debate, but these are the dark arts of government – not open censorship, but the slow erosion of credibility. That credibility is the cornerstone of American influence in global finance. Lose it, and the cost of borrowing rises. Investment hesitates. Confidence slips.
Sacking those who drive these institutions has consequences. In this case, the results were immediate. On Friday, the US Dollar Index (DXY) fell 1.3%, closing at about 98.69, after hitting a high of 100.26 earlier in the day – the highest level since late May. Despite its earlier strength – up about 1.5% over the prior week, its largest weekly gain since November 2024 – it ended the day sharply lower due to disappointing jobs data and political turbulence.
Chart 2: DXY Dollar Spot Index Under Pressure on 1 August
Source: Bloomberg
This Friday sell-off came soon after weak US payroll numbers – just 73,000 new jobs added in July and downward revisions of 258,000 jobs for May and June – prompting growing concerns about a weakening labour market and increased pressure on the Fed for rate cuts. The abrupt fall underscored how fragile the recent rally had become.
Chart 3: US Non-Farm Payrolls (‘000s)
Source: Bloomberg
If we have one mantra for the future currency markets, it is that you cannot trust the dollar. We believe that global investors have somewhat passively just assumed that the dollar is a one-way bet on strength, given its upward trajectory over the past 10 years. Note also the contrast with Trump’s last presidency when the dollar was consistently strong. By his own admission, Trump didn’t get his way during his first presidency. In his current term, he is truly getting his way on policy-making. As is evident, that has a very different consequence for the dollar.
We have some simple advice for investors: diversify your currency exposure. For those that have liabilities in other currencies, we advise ensuring a match against those liability exposures. So, for example, if your lifestyle is in euros, make sure you have sufficient exposure to euros in your assets. For those based in dollars, to maintain real spending power, we advise diversifying 20-30% of exposure to other currencies. And of course, there is always gold.
In bond markets, high-risk premiums for US debt will likely manifest in higher real yields. We have noted the ongoing risk in real yield for the best part of the year.
Chart 4: US 10-year Real Yield Potentially Headed Above 2%
Source: Bloomberg
However, in the near term, the knee-jerk reaction is for bond yields to rally due to a feared increase in recession risk.
Chart 5: US10-Year Bond Yields Drop Sharply as Labour Market Data Surprises to the Downside
Source: Bloomberg
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
4th August 2025
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