The unemployment rate climbed to 4.3% as anticipated, while the participation rate ticked slightly higher – but not enough to improve the outlook. On the contrary, the US labour market is expected to deteriorate further amid mass deportations, restrained immigration and tariff-related uncertainty. Manufacturing shed another 12K jobs in July, suggesting the bleeding may continue before production and employment eventually shift back to the US – though many of those factory-floor jobs will likely be replaced by robots.

For now, the weakening jobs picture fuels expectations that the Federal Reserve (Fed) will not only cut rates in September but may have to cut more aggressively to shore up the labour market and compensate for what many see as a delayed response. To me – and many others – the Fed’s wait-and-see stance on inflation amid tariff disruptions made sense, as it was hard to paint a rosy picture for the US economy in such conditions. But if inflation doesn’t pick up – which is highly surprising – then yes, they’ll have to lower rates to avoid political and public backlash.

The US 2-year yield briefly slipped below 3.50% and is consolidating just above that level. The probability of rate cut in September surged to 100%, while Fed funds futures now price about a 10% chance of a 50bp move. Many now think the Fed could cut at all three remaining meetings this year and might even pause balance sheet tightening, depending on how quickly the labour market deteriorates and whether inflation ticks up – or doesn’t.

This week, we’ll shed some light on inflation dynamics. Last month, US CPI showed little consumer price pressure, while producer prices jumped – suggesting tariff costs were mostly absorbed by companies. We’ll see if some of those input costs are now passed on to consumers. On Wednesday, PPI is expected to show easing pressure in August. But on Thursday, CPI could warn that tariffs are starting to show up in headline inflation. A softer-than-expected print could temper Fed dovishness – but rate cuts are coming and risk assets will continue to enjoy the scent of cheaper money.

The S&P 500 hit a fresh record high after the payrolls data. The index closed Friday slightly lower, though more S&P 500 constituents ended the day in positive territory. The limited appetite could be blamed on Nvidia, which fell 2.7% after news that OpenAI will start mass producing AI chips with Broadcom. Capital rotated into Broadcom, which surged as much as 15% before paring gains to close up more than 9%.

In Asia, dovish Fed expectations boosted sentiment. The Nikkei jumped at the open, and European and US futures point to a positive start to the week. Chinese investors, however, were cautious on weakening exports and a smaller-than-expected August trade surplus.

Inside Japan: Prime Minister Shigeru Ishiba resigned over the weekend under mounting LDP pressure to step down. The news pushed the USDJPY lower at the open, on expectations that his successor will pursue looser fiscal policy and that political instability could delay a Bank of Japan (BoJ) hike. But the dark side is rising fiscal concerns: 20- and 30-year JGB yields reversed their recent decline and climbed higher on prospects of looser fiscal discipline.

Rising long-term yields are a quietly building risk for global risk appetite. In the US, the 30-year Treasury yield dropped below 4.80% after the weak jobs data, though risks remain.

Speaking of risks, French PM François Bayrou faces a make-or-break no-confidence vote today. His government is likely to collapse under opposition pressure, which could weigh on French stocks and bonds and cap euro gains into 1.18. Still, the dollar’s trajectory will ultimately decide whether the EURUSD deserves to reach 1.20. Net speculative positioning in the euro is strongly positive, meaning any adverse news could trigger a sharp correction.

In energy, US crude opened the week with a rebound after testing $62 per barrel support on Friday, just ahead of the OPEC meeting. OPEC announced supply increases of 137K barrels/day from October – which was below the previous moves, below expectations and flexible. That prompted some oil bears to take profit after last week’s 3.5% slide. Prices could correct further into the $65–66 range, which includes a key Fibonacci level as well as the 50- and 200-day moving averages. A breakout above would likely require fresh geopolitical tension.