A weak US employment report in early August 2025 reignited fears that the world's largest economy could be sliding toward stagflation, a mix of slowing growth and sticky inflation. While Wall Street sold off sharply on the news, emerging-market equities continued a run that had them outperforming developed markets by one of the widest margins in years, underscoring a growing divergence in how investors were pricing risk across regions.
A Jobs Report That Rattled Confidence
The Bureau of Labor Statistics reported on 1 August 2025 that US non-farm payrolls rose by just 73,000 in July, well below the 100,000 economists had forecast, while May and June figures were revised down by a combined 258,000, leaving June's gain at only 14,000. The household survey was even weaker, showing a drop of 260,000 workers, and the average duration of unemployment climbed to 24.1 weeks, its highest level since April 2022. Hours after the release, President Trump dismissed the Commissioner of the Bureau of Labor Statistics, alleging without evidence that the figures had been manipulated, a move that drew criticism from economists over the independence of official data.
Why Stagflation Fears Resurfaced
The report landed alongside a separate signal of economic strain: the ISM Manufacturing PMI fell to 48% in July from 49% in June, its fifth straight month in contraction territory, with none of the six largest manufacturing industries expanding. New US tariffs of up to 41% on imports from roughly 69 trading partners were set to take effect on August 7, 2025, adding to cost pressures just as hiring slowed. That combination, weak growth and hiring alongside price pressures still running hot, is the textbook stagflation risk, and it complicated the Federal Reserve's calculus heading into its September meeting, reviving a debate that had simmered since earlier in the year.
US Equities Sink While Emerging Markets Hold Firm
US stocks fell sharply on the day, with the S&P 500 dropping 1.60% to 6,238.01, the Dow sliding 1.23% to 43,588.58 and the Nasdaq Composite tumbling 2.24% to 20,650.13, marking their worst session in weeks. Emerging-market equities proved far more resilient over the year, with the MSCI Emerging Markets Index on pace to outperform the S&P 500 by its widest margin in roughly 17 years, helped by a softer dollar, improving governance and stronger balance sheets across several developing economies. That divergence meant investors positioned in broad emerging-market baskets were largely insulated from the worst of the day's US volatility, even as headline sentiment worldwide turned more cautious.
What It Means for Traders
The episode highlighted how a single US data release, compounded by an unprecedented dismissal of the official responsible for it, can ripple across asset classes, hitting risk sentiment in developed markets while leaving pockets of relative strength elsewhere. For traders, it reinforced the value of watching regional divergence, not just headline US indices, when assessing risk appetite, since capital rotation into emerging markets can persist even as US benchmarks wobble. Watching labour market revisions alongside the headline payrolls number, and any further questions about data credibility, is increasingly important given how much both have moved markets recently.
Daily market analysis by BCM Markets.