Creatix Economist / September 17, 2025
The Federal Reserve has begun cutting rates again. This is the first reduction since December of last year. This much anticipated rate cut was already priced in several weeks ago. Now that the cut is official, it changes the narrative on Wall Street. Historically, rate cuts are bullish when the economy avoids a downturn. But this cut arrived alongside a weakening labor market and heightened policy/geopolitical uncertainty. These conditions that can push investors to price in recession risk and take profits, potentially setting off a meaningful correction. (Reuters)
A cooling jobs engine
The latest jobs report showed payrolls barely grew (+22,000 in August) and the unemployment rate ticked up to 4.3%, near a four-year high. Participation has slipped over the past year and long-term unemployment has risen. This looks less like a soft patch and more like a frozen hiring landscape in several cyclicals. This backdrop motivated the Fed to ease rates, and markets may read it as late-cycle.
Why a rate cut can be bearish
Cuts aren’t inherently bad for stocks; the context matters. When the cuts are connected to recession fears, equities have historically struggled after the first cut. With job growth stalling and unemployment rising, clever investors can read between the lines to assume that the Fed is responding to weakness, and to political pressures from the administration. (Reuters)
Tariffs and policy fog
After April’s executive order establishing a “reciprocal tariff” regime, the White House has issued multiple follow-ons that keep the playing field shifting. On Apr 2, 2025, EO 14257 created the framework; Apr 9 then adjusted the schedule to reflect retaliation and alignment by trading partners (EO 14266). On Jul 31, another order further modified the rate table—effectively setting country-specific tariffs that, in practice, now range roughly from 10% to 41%—with implementation waves kicking in as early as Aug 7 and later dates for some lists. A Sep 5 order added procedures to update annexes and implement deals on the fly. For CFOs and supply-chain teams, that means real-time recalculations of landed costs, hedging, and pricing—hard to guide confidently when the rate table can change again next quarter. (The White House)
The uncertainty isn’t only administrative—it’s legal. A federal appeals court ruling in early September deemed large parts of the tariff program illegal, raising the odds of a Supreme Court showdown and leaving corporates guessing which rules will apply to contracts that span multiple quarters. Markets tend to discount that policy risk with lower valuation multiples even when near-term revenues hold up, and we’ve already seen guidance cuts and caution from bellwethers in logistics, autos, restaurants, and consumer goods as tariff costs ripple through prices and demand. (Reuters)
Geopolitical risk isn’t helping
Market-attention gauges like BlackRock’s Geopolitical Risk Indicator (BGRI) show elevated and persistent readings in 2025. Its latest outlook frames geopolitics as structurally higher in this regime. Elevated risk assessments raise the discount rate investors apply to future cash flows, which is yet another channel for potential downward pressure on equity valuations. (BlackRock)
On the ground, flashpoints keep intersecting with supply chains: Red Sea attacks have resurfaced, pushing up marine insurance and forcing detours; Taiwan-Strait tensions continue to prompt tail-risk planning among global allocators; and the Russia-Ukraine conflict still swings energy and shipping costs. Each episode doesn’t just threaten inputs; it muddies corporate capital-expenditure timing and inventory strategies, further dampening risk appetite. (Reuters) Trump's questionable killings off the coast of Venezuela are not geopolitically reassuring for anyone.
Why profit-taking could snowball
After a long run, many indices sit near highs and positioning has been crowded in winners. When the Fed signals labor-market concern, investors often rotate first and then de-risk. If earnings revisions soften while unemployment drifts higher, profit-taking can broaden from megacaps to cyclicals, feeding a self-feeding correction accelerated by trading algorithms. Note that stocks initially cheered the cut, and then began a mini roller coaster race this afternoon. Nothing precludes a second-leg reaction this week and next as recession odds are repriced. (Reuters)
What to watch next
-
Jobs & wages: another weak payroll print or a further rise in jobless rate would validate the “pricing-in-recession” thesis. There's no reasonable indication of a strengthening in the labor market. The federal government has laid off or bought out thousands and has implemented a hiring freeze. Corporate hiring outside of the healthcare industry is practically frozen.
-
Earnings guidance & revisions: the combination of tariff pressures on supply and weak demand due to weak employment may lead to downward revisions on corporate earnings guidance, furhter feeding a sell-off sentiment.
-
Financial conditions: if credit spreads widen while the Fed is easing, markets are signaling growth economic stress. Corporate bond yields rise faster than Treasuries (credit spread) when perceive higher default risk from corporations and demand extra compensation for lending them money. If that happens even as the Fed is cutting rates, the bond market is effectively saying growth fears are intensifying and financial conditions are tightening for borrowers regardless of the lower policy rate. (Reuters)
Bottom line
Rate cuts with rising unemployment, policy/tariff uncertainty, and elevated geopolitical risk are exactly the mix that can push Wall Street to price in a recession. That often starts with broad profit-taking and can tip into a significant correction if earnings and labor data keep deteriorating. Staying nimble—watching employment data, guidance trends, and credit spreads—will tell you whether this is a shallow reset or the market beginning to discount a harder landing.
Sources: Fed policy move (Reuters); labor data (BLS); tariff executive actions (WhiteHouse.gov); geopolitical-risk indicator (BlackRock); historical market behavior around first cuts (Reuters explainer).
www.creatix.one
Comments
Post a Comment