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Markets Weigh Weak US Jobs Data, Strong Japanese Wages, and Cooling Chinese Equities
The past week highlighted the contrasting forces shaping global markets. In the US, a dismal jobs report deepened concerns over slowing growth but, interestingly, strengthened expectations of Fed easing. In Japan, wages surprised to the upside, reinforcing a reflationary narrative and supporting equities. Meanwhile, equity markets in China cooled after a torrid rally, with regulators signalling unease at speculative excess. Taken together, the picture is one of divergent regional dynamics, but with an undercurrent of resilience in global growth and investor risk appetite.
US Jobs Data Signals Economic Cooling, Eyes on Inflation
Friday’s US employment report confirmed that labour market momentum is faltering. Nonfarm payrolls grew by just 22,000 in August, well below the expected 75,000, with numbers for prior months revised downward. The unemployment rate rose to nearly a four-year high of 4.3%, also the highest of the cycle, while participation held steady. Analysts now expect the Bureau of Labor Statistics’ annual benchmark revisions to reduce reported employment by as many as 800,000 jobs.
Chart 1: US Employment Change (month-on-month)
(‘000)
Source: Bloomberg
Markets took the weak jobs data in stride. Equities dipped modestly, but credit spreads held near recent tights, and growth stocks found support as bond yields tumbled. The 2-year and 10-year Treasury yields fell to multi-month lows as investors priced in easier Fed policy going forward. The futures market now discounts three rate cuts by year-end, starting with a fully priced 25bp move at the September FOMC. Yet, the steepness of the curve out to 30 years reflects enduring concerns about political interference at the Fed, a widening fiscal deficit, and a rising debt-to-GDP ratio. Fed rate cuts do not solve the challenge of the market’s wait for the next Supreme Court’s decision on whether the tariffs are valid or not.
Chart 2: US Yield Curve Steepness – 2-30 years (%)
Source: Bloomberg
With the much-awaited employment figures out, attention now shifts to US inflation. Consensus expectations for headline and core CPI for August sit at 2.9% and 3.2%, respectively, with PPI expected to moderate after July’s surprise surge. The majority of tariffs came into effect on 1 August, but their impact on consumer prices will likely be delayed because of inventory stockpiling. However, the sharp drop in oil prices (Brent is below $65) and an easing of gasoline prices have somewhat offset the tariff impact. Given energy’s 7% weight in CPI, a sustained $10 decline in Brent typically cuts headline inflation by 0.2–0.3 percentage points over time. This should soften the tariff drag, at least in the near term.
Japan’s Wages Surprise to the Upside, Supporting Equities
Japan provided a rare upside surprise. Total cash earnings jumped 4.1% year-on-year in July, while real wages rose for the first time in more than a year. Gains in real wages were broad-based, with base pay and overtime both strengthening. This wage momentum bolsters consumption and gives credibility to the Bank of Japan’s goal of securing sustainable reflation.
Chart 3: Japan cash earnings (% change year-on-year)
Source: Bloomberg
Markets welcomed the development. Japanese equities advanced, with domestically focused mid- and small-cap names outperforming. The JPY strengthened modestly as investors reassessed the BoJ’s trajectory. With wages accelerating, Japan is evolving into a dual narrative: a structural reform and governance story, but increasingly also a domestic demand and late-cycle reflation play. The resignation of Prime Minister Shigeru Ishiba at the weekend will in our view add to the hope for ongoing structural change narrative in Japan. However, the range of potential candidates and their likely policies is wide, so expect some volatility.
China Equities Cool as Speculative Excess Emerges
Chinese equities, by contrast, stumbled after a powerful rally year-to-date. Recently margin financing surged to a record $320 billion as investors chased tech and consumer cyclical names, prompting regulators to voice concern over financial risks and hint at measures to curb what they feel is excessive leverage.
The CSI 300 fell 2% on the week, snapping a multi-week streak of gains. While valuations remain attractive relative to history, the speed of the rebound has left markets vulnerable to profit-taking – and policy tightening. Macro fundamentals present a mixed picture, however: deflationary pressures are persisting, and the property sector remains a drag, though targeted stimulus has offered some support. International investors remain underweight, and sustained flows into Chinese equities will depend on clarity over regulatory stance and the durability of the stimulus.
A Divergent but Resilient Global Picture
The three major economic blocs illustrate divergent dynamics: the US is grappling with cyclical slowdown and political uncertainty, Japan is benefiting from long-awaited wage reflation, and China is contending with the risks of speculative excess against a fragile macroeconomic backdrop. Yet, despite these differences, global growth remains reasonably upbeat, helped by easing inflation pressures from lower energy prices and continued policy accommodation.
Geopolitical Fault Lines Deepen
This past week also saw a rare and symbolically charged summit between the leaders of Russia, China, and North Korea, signalling deepening strategic ties among three nuclear powers with growing hostility toward the West. The optics were striking and ironically timed with the US Pentagon’s rebranding as the “Department for War,” a move that stoked political controversy at home. The overt alignment between three authoritarian regimes also amplifies Ukraine’s role as a proxy battleground in an increasingly polarised global order. For geopolitical analysts, the alignment complicates Western efforts to isolate Russia and signals rival blocs’ intent to harden positions. The implications are serious: fragmentation of the international system, greater escalation risk in Asia, and a sharp reacceleration in global defence spending. Ukraine now represents not just a regional conflict, but a widening front in a broader confrontation between East and West—making increased defence budgets all but inevitable.
The Week Ahead: Key Events to Watch
The week sees several key data releases. In the US, August CPI (Wednesday) and PPI (Friday) will offer a fresh read on inflation dynamics just as the Fed debates its September policy move. Retail sales and the University of Michigan’s sentiment survey will provide further insights into consumer resilience.
In Europe, the European Central Bank meets on Thursday. While we expect status quo, markets will parse any forward guidance closely in light of weakening PMIs and mounting fiscal strains in core economies.
In Asia, China will publish credit and trade data, which will be scrutinised for evidence of stimulus traction and resilience in external demand. Japan will release machinery orders and consumer confidence figures, adding further texture to the reflation debate.
Against a backdrop of fragile labour markets, shifting inflation dynamics, and rising geopolitical risks, these data points and policy signals will be critical in shaping both investor positioning and market volatility into the final quarter of the year.
Market Implications
We remain overweight Japanese equities, where wage growth provides a clear domestic reflation story alongside ongoing governance reform.
In China, the market looks vulnerable to near-term profit-taking after the rapid rally of recent weeks, but we would maintain exposure: the government remains supportive of growth, valuations are attractive, and policy tools remain available. Remember there is also the key annual gathering of China’s Communist Party in October where they will deliberate on the next Five year plan.
In developed markets, there is less near-term conviction to favour Europe over the US. Rate cuts of up to 75bp by year-end should support US risk assets, but investors must remain mindful that the US carries a much greater risk of an inflation or stagflation problem ahead.
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
8th September 2025
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