Instead of focusing on Wednesday’s Nvidia Corp. (NVDA – $181.77) earnings release, Federal Reserve Governor Lisa Cook mortgage applications or the engagement of Taylor Swift and Travis Kelce (although each is important in its own way), we suggest that the financial press focus on something that could have long-term implications for all global financial markets — the crisis surrounding the French Prime Minister.

Confidence Vote on September 8, 2025

There are really important issues in the world and France is one of them. This week French Prime Minister Francois Bayrou warned that France’s debt was increasing at a pace of nearly $14 million every hour for the last 20 years* and austerity was needed to prevent a financial crisis. In France, the single biggest government expenditure is that of interest on its debt. Bayrou proposed a 2026 budget that included a slower rate of growth for government spending that would save roughly $51 billion a year. This sounds reasonable since spending would grow but at a slower pace. However, the public response was immediate and clear. Protests, strikes and demonstrations by trade unions were planned for September 10 with the goal of shutting down all of France. This week Prime Minister Bayrou announced he would call for a confidence vote on September 8 to stem the protests; nevertheless, the administration of President Emmanuel Macron is in serious crisis mode for the second time in nine months. The previous Prime Minister, Michel Barnier, was brought down in a similar way in December 2024 when the opposition parties joined forces against his budget.

In France the president is head of state and has authority on foreign policy and national security. The president appoints a prime minister who has the responsibility to run domestic affairs. Prime Minister Bayrou, 74, is a close ally of Emmanuel Macron but he is expected to lose the confidence vote since opposition parties on both the far right and left have stated they plan to eject him. Macron could move swiftly to appoint a new prime minister, but they would also risk being ousted over a budget proposal.

The problem is real. France’s debt was €3.3 trillion in the first quarter of this year, or 114% of GDP and is expected to reach 116% of GDP later this year. The country’s annual deficit was €168.6 billion ($196.0 billion) in 2024, equal to 5.8% of GDP, which puts France, the second largest country in Europe, in a worse fiscal state than Greece, Spain and Italy. As a result, the French stock market fell this week with financial stocks taking the greatest hit. French borrowing costs also moved higher, joining the highest in the eurozone, but not (yet) at levels that reflect a full-blown crisis.

Cygne Noir

In France the political will for fiscal reality does not seem likely to appear any time soon; if this is true it may take a full-blown crisis to wake up politicians. Reality is apt to be delivered by the bond market since fixed income markets have often played the role of the disciplinarian in times of financial laxity or excess. Forecasters talk about Black Swan events as if they were unpredictable; however, in France’s case, the writing may already be on the wall.

US economists should take heed. Few waved a cautionary flag in the last five years while the US deficit to GDP averaged well above 6%. It averaged 6.4% in fiscal 2024 which ended in September and soared to 7.2% of GDP when President Trump came to office in January. In our “Outlook for 2025 – A Year of Promise and Potential Turbulence” (December 23, 2024) we wrote: “Debt as a percentage of GDP currently stands at 124% …. This massive federal debt issue is the biggest risk to the bond market in a generation, and it will be a major impediment in 2025. It behooves equity investors to monitor the bond market in 2025, since it is often the precursor to stock market declines.”

We are encouraged by the fact that Secretary of the Treasury Scott Bessent has often indicated that lowering government deficits is a key priority of his team. Perhaps France’s pending fiscal crisis gives more meaning to President Trump’s unorthodox methods to reduce government debt. One of these is revenue from tariffs. Another novel idea for the US (but not for countries such as Saudi Arabia) is to establish a sovereign wealth fund to promote the long-term financial health of the US. The 10% non-voting stake in Intel Inc. (INTC – $24.35) where the US government (we the people) could get a benefit for the money invested in the company. Intel already received $2.2 billion in funding under the CHIPS and Science Act, and the additional $8.9 billion brings the government’s total investment to $11.1 billion. Much has been made in the media regarding this “transaction” but only because the media is unaccustomed to having a businessman in the Oval Office. Moreover, President Trump’s actions have been totally transparent which is not typical of most politicians or lobbyists.

The House Slump

President Trump has also been openly lobbying the Federal Reserve to lower rates. Recent housing statistics suggest this would be helpful to the economy. According to the National Association of Realtors (NAR), residential real estate affordability hit a 40-year low of 89.9 in October 2023, the lowest since October 1985. The June 2025 reading was higher at 94.4, but the lowest since July 2024. (The July report will be released on September 12, 2025 prior to the FOMC meeting.) In short, affordability is a problem in the housing industry. Much of this is due to mortgage rates, which at 6.9% are above levels seen for most of the last 23 years. Not surprisingly, in the second quarter of the year homeownership fell to 65%, the lowest percentage since the third quarter of 2019. See page 3.

There are many signs of weakness in the housing market. Softness is seen in building permits, which at 1.354 million in July matched the cyclical low reported in January 2023. Overall, total permits were down 5.7% YOY and single-family permits fell 7.9% YOY. Housing starts revived in July to 1.428 million, which was up 5.2% for the month and up 12.9% YOY. Single-family starts were 939,000, up for the month and up 7.8% YOY. But the stress in the housing market is beginning to show up in prices where new single-family home prices fell 5.9% YOY, existing home prices were flat YOY, and the FHFA latest price for June indicated that prices were decelerating, but up 2.6% YOY. See page 4.

July construction data will be released next week and since June’s release displayed weakness it will be important to see if this was a short-term phenomenon or the start of a longer-term trend. In June, the annualized rate for total construction was $2.14 trillion, down 2.9% YOY. Total residential construction was $895.1 billion, down 6% YOY. For total construction, this was the longest negative YOY stretch since early 2019. This is a concern; however, we expect that new tax law changes which allow for full expensing of capital expenditures in each tax year will boost construction in the second half of the year.

The technical condition of the equity market improved in recent days, and the NYSE advance/decline line made a new high with the DJIA on August 22, 2025. However, upside volume remains neutral, and this implies the current rally is at risk of a pullback. We would be buyers on any weakness. *https://www.wsj.com/opinion/france-budget-debt-francois-bayrou-emmanuel-macron-economy-6a5ca406

Gail Dudack

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The main event for financial markets this week will be the Federal Reserve’s August 21-23 Jackson Hole symposium, where, on Friday, Chair Jerome Powell is due to speak on the economic outlook and central bank policy. Markets are on edge in anticipation of these remarks because the futures markets have already priced in at least two 25 basis point rate cuts this year. In short, the futures markets expect Powell and the FOMC to change their collective view from one that suggests tariffs present an inflationary risk to one that says the worst of the tariff impact is already priced in. Such a shift in outlook should be easy under normal circumstances; however, egos are involved in this decision. Therein lies the rub.

Politics and egos should not play a role in Federal Reserve policy or in Wall Street’s economic and fundamental forecasts; but they do, and that can be dangerous for investors. When we look at just the data, without a filter, we see room for the Fed to begin rate cuts in September.

July’s inflation data was mixed with headline CPI unchanged at 2.7% YOY and core CPI at 3.1% YOY, up from 2.9%. However, in both cases, the stickiest part of inflation was found in service sector prices and unrelated to tariffs. See page 3.

PPI data for finished goods in July was unchanged at 1.9% YOY and core finished goods prices rose 2.9% YOY, up from 2.7%. But it was the PPI final demand index at 3.3% YOY, up dramatically from 2.4% in June, that alarmed investors. This was a big jump, however, 3.3% merely matched the February 2025 level before tariffs were in place. Moreover, 30% of the July rise in PPI final demand could be traced to higher margins in services, in particular for machinery and equipment wholesaling. This jumped 3.8% YOY. Keep in mind that the Trump administration’s tariffs apply only to physical goods, not to services. 

When we broke down the final demand PPI 3.3% YOY into its main constituents we found that the PPI final demand for goods was 1.9% YOY (final demand foods rose 4.2% YOY, final demand energy fell 3.2%, final demand goods less foods and energy rose 2.8% YOY), final demand services was 4.0% YOY (final demand trade services 6.9%, final demand transportation and warehousing service 0.9%, final demand services less trade, transportation, and warehousing 3.1%), and final demand construction 1.1%. In short, just like in the CPI, the inflation seen in July originated from the service sector, not from tariffs.

Inflation numbers have not yet reached the Federal Reserve’s target of 2% YOY, and the deceleration seen earlier in the year appears to have stalled in July. Our concern is that the media’s obsession with tariffs and inflation has given the service sector an excuse to increase margins by raising prices. This is a problem for consumers. However, even after the upticks in July, all inflation benchmarks remain below the long-term average of 3.5% YOY and that is a positive.

Import prices, which are pre-tariff calculations, fell 0.2% YOY, the third consecutive month of declining import prices. Import prices excluding petroleum products were up 1% YOY, relatively unchanged from June. This implies that sellers to the US are keeping prices low and absorbing some of the administration’s tariffs. The Fed’s favorite benchmark, the PCE index, rose 2.6% YOY in June, up from 2.4% in May, but it too remains below the 2.7% YOY pace seen in February. Once again, there are little or no signs that tariffs have had an inflationary impact on the US economy to date. See page 4.

The Federal Reserve left interest rates unchanged in 2025 based upon the potential risk seen for a tariff-driven inflationary cycle. Several months ago, Chairman Powell cited inflation expectations as a sign of future inflation risk. However, consumer and economic surveys have proven to be very inaccurate due to an imbedded political bias. For example, in June according to the University of Michigan’s survey of consumers, the expected one-year change in prices was a 6% increase. When this number is broken down by political affiliation, the one-year median increase expectation for prices was 9.3% for Democrats, 7.3% for independents, and 1.5% for Republicans. In other words, not only are many, if not most surveys demonstrating a political slant, and a frightening outlook for inflation, but they have also been wrong. After discovering this bias, we have paid little or no attention to consumer sentiment surveys.

In our opinion, forecasters should focus on facts not feelings. The current effective fed funds rate is 4.33%. Inflation is presently between a low of 2.6% (PCE deflator) and a high of 3.1% (Core CPI). This means the real fed funds rate is in a range of 125 to 175 basis points. Assuming the worst of the tariff impact is behind us and that the real fed funds rate typically averages 100 basis points, the fed funds rate should be 25 to 75 basis points lower today. See page 5. This allows for a 25 to 50 basis point cut in September. Keep in mind that inflation and employment data for August will be released before the next FOMC meeting and new data should make the Fed’s policy decision easier to predict.

The National Association of Home Builders index backtracked slightly in August to 32 and remains well below the 50-point threshold, marking poor building conditions over the next six months. A lack of buyers boosted house inventories in July and the 9.8 months of supply of new homes has inspired builders to use sales incentives. Nonetheless, in July, housing starts rose 5.2% YOY, with gains seen primarily in multifamily units, which represent a lower priced alternative for many consumers. Multifamily starts rose 9.9% YOY. On the other hand, housing permits fell 2.6% YOY in July overall and fell 8.2% YOY in the multifamily sector. See page 6.

From a technical perspective, our 25-day up/down volume oscillator is at 0.98 this week and neutral. The last positive readings in this breadth indicator were the one-day overbought readings of 3.15 on July 3 and 3.05 on July 25. This followed the oscillator being overbought for 9 of eleven days in May during which it reached a high of 5.10 on May 16. The 5.10 reading was the highest overbought reading since August 18, 2022 which appeared shortly after the market rebounded from its June 16, 2022 low. This was very positive performance and characteristic of a bull market cycle. See page 9. However, despite the positive readings made in July, this indicator is yet to confirm the new highs made by the S&P 500 and Nasdaq Composite last week. To do so, the oscillator should record an overbought reading of 3.0 or higher for a minimum of five consecutive trading days. At present, this indicator suggests advancing volume has been weakening in August. The longer this disparity continues, the greater the risk is that equities experience a near-term pullback. For example, a rate cut in September could generate a sell-on-the news decline. However, from a longer-term perspective, we would view this as a buying opportunity. Earnings have outperformed expectations in the first two quarters, and we believe this will continue in the second half. In short, a good economy and good earnings supports equities.

Gail Dudack

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Last week we wrote “the real driver of equity prices in August may be the expectation that the fed funds rate will be cut at the September 16-17 meeting. History suggests that stocks rise in the months following the first rate cut, particularly if it is the first of a series of rate cuts. In short, despite the weakness seen in revised jobs data, the equity market is expected to be higher in the second half of the year.”

This week, after the CPI report for July, the consensus view began reversing in favor of a rate cut in September, and not surprisingly, the equity market, as measured by the S&P 500 and Nasdaq Composite index, rose to all-time highs. At present, this rally has an important technical flaw, but first it is important to look at the most recent CPI report.

July’s CPI report showed headline inflation to be 2.7%, up fractionally but essentially unchanged from June and core CPI was 3.1% YOY, up from the 2.9% seen in June. However, July’s rise in core CPI brings this benchmark back to the level seen in February 2025 and at 3.1% YOY, core CPI remains well below the inflation levels seen in the second half of 2024. More importantly, the rise in core inflation was NOT due to tariffs but was the result of large price increases in areas such as in motor vehicle maintenance and repair (up 6.5% YOY), fuels & utilities services (up 6.5% YOY), tenants’ and household insurance (up 5.8% YOY), other goods and services (up 3.9% YOY), and medical care (up 3.5% YOY). Meanwhile, areas expected to be impacted by tariffs such as apparel prices, new vehicles, and alcoholic beverages saw prices fall 0.2% YOY and rise 0.4% YOY and 1.4% YOY, respectively. In sum, the July report showed no sign of tariff inflation – to the despair of many forecasters. See page 3.

There will be new employment and inflation data prior to the FOMC meeting in September; however, unless the current trends in employment and inflation reverse dramatically, the Federal Reserve is apt to cut rates by 25 basis points at this meeting. This has been our expectation all year.

Unfortunately, it appears that politics is impacting Wall Street prognosticators. While most economists have been waiting for tariffs to trigger both inflation and a recession, little attention has been given to what we believe is the main risk of 2025 – deficits and government funding needs. In December, at the end of Biden’s term in office, the 6-month average of monthly federal deficits was $212 billion, an unsustainable pace. Recent US Treasury data for July 2025 shows the 6-month average of monthly deficits fell to $131 billion, down 38% from December and down 20% from the $164 billion seen in July 2024. As a result, the federal government’s need for debt issuance should also fall. The government’s “borrowing from the public” was only $3.2 billion in June but jumped to $573 billion in July, the highest monthly level in over three years. As a result of July’s increase, the 6-month average jumped to $224.9 billion in July, and the 12-month average increased to $133.7 billion. Still, the current 12-month average debt issuance to the public is below the pace seen from July 2023 through January 2025. See page 4. In short, Secretary of the Treasury Scott Bessent is doing a respectable, or one could say remarkable, job of lowering the deficit. It is therefore not a surprise that July’s $573 billion in new issuance did not disturb the debt market at all.

The Small Business Optimism Index rose 1.7 points in July to 100.3, slightly above the long-term average of 98. Of the components, six increased, two decreased and two were unchanged. There was good news and bad news in the details of this report. Plans to increase employment increased a point to 14 and plans to raise prices fell four points to 28. However, poor sales rose one point to 11 as the “single most important problem” for small businesses. This “poor sales” index appears to be in an uptrend. The problem with this is that the unemployment rate also moved up in July and a rising trend in these two indices has been a lead indicator of many recessions. We doubt that the FOMC monitors this parallel, but it does suggest that a rate cut may be a good insurance policy against higher unemployment. See page 5.

Total consumer credit in June was $5.055 trillion, up from $5.047 trillion a year earlier — a gain of 0.5%. The growth was concentrated in nonrevolving credit, which grew 1.6% YOY. Revolving credit (mostly credit card debt) decreased 2.5% YOY to $1.3 trillion. On a 6-month rate of change basis, total credit increased 2.1%, nonrevolving rose 2.8% and revolving credit was unchanged. The importance of this is that from December 2024 to February 2025 credit growth was negative on a year-over-year basis. Negative credit growth tends to be a sign of a recession See page 6.

With first quarter earnings season soon coming to a close, it is clear that corporate earnings were far better than analysts expected. Again, forecasters have been excessively pessimistic about tariffs. This week’s S&P Dow Jones consensus earnings estimate for calendar 2025 is $258.65, up $1.46. The earnings forecast for 2026 is $300.42, up $1.14. The LSEG IBES estimate for 2025 is $266.84, an increase of $1.98 this week, and the 2026 estimate is $302.61, up $1.17. The IBES guesstimate for 2027 is $342.44, a jump of $2.11. In sum, these are big earnings revisions and as a result S&P 500 estimates are approaching our forecasts of $270 for this year and $310.50 for next year. Keep in mind that our estimates may still be too conservative. See page 8 and 14.

Nevertheless, equity valuations remain rich. The S&P 500 trailing4-quarter operating earnings multiple is currently 26.0 times. The last time the market demonstrated great value was the intra-month PE low of 20.7 times earnings in early April. The PE is down this week due to higher earnings results, but still above both the 50-year average of 16.8 times and the 5-year average of 21.5. Using 2026 S&P Dow Jones estimates, the 12-monthforwardPE multiple is 21.8 times and well above its long-term average of 17.9 times. When this PE is added to inflation of 2.7%, it comes to 24.5, which places the equity market just above the normal range of 15.0 to 24.1. See page 7. However, neither PE multiple suggests the equity market is an extreme bubble-like levels. In short, stocks could go higher this year.

From a technical perspective, the NYSE cumulative advance/decline line made a new high on August 12, 2025, confirming the highs made in the S&P 500 and Nasdaq Composite. And the 10-day average of new highs and lows remains bullish. However, the 25-day up/down volume oscillator is at 0.49 this week and neutral. This indicator recorded one-day overbought readings of 3.15 on July 3 and 3.05 on July 25, which followed the indicator being overbought for 9 of eleven days in May. It reached a high of 5.10 on May 16, which was very positive performance, and it predicted the highs in the indices that began in June. Overall, this was characteristic of a bull market cycle. However, this indicator is yet to confirm the recent string of new highs made in the indices and reveals that advancing volume is weakening in August. To confirm the rally, the oscillator needs to maintain an overbought reading of 3.0 or more for a minimum of five consecutive trading days. There is still time for the oscillator to confirm, but the longer the nonconfirmation lasts, the more likely there will be a pullback – perhaps after the FOMC meeting. We would not be surprised if there is a “sell on the news” correction.    

Gail Dudack

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President Trump’s firing of BLS Commissioner Erika McEntarfer may have been unfair for several reasons and we doubt that July’s report was politically motivated. But we wonder if our shock to the Commissioner’s firing is because she works in the public sector. Making large and consistent errors in forecasts when working in the private sector could easily result in one being fired for cause. But regardless of the fairness of this event, it placed a much-needed spotlight on the messiness of government data. It may result in some necessary changes and hopefully result in more reliable data.

The monthly employment report has always been an “estimate” of jobs built on a survey, and while the data has always been imprecise, the estimates have simply gotten worse in our view. We have known this for years, which is why we focus on broad based trends in the data rather than any individual data point. And if you want to use government data, or any data properly, you must first understand its methodology and its weaknesses.

The BLS reported a paltry 73,000 jobs were added to the workforce in the month of July, but more shockingly, previous months were reduced by 258,000 jobs. This was a record level revision and the BLS attributed it to additional data and a recalculation of the seasonal adjustment. The unemployment rate increased slightly to 4.2%. The report showed that government employees declined by 10,000 but there were 14,100 job losses in the federal government excluding the post office. State employment increased by 5,000. The media reported that the response rate to surveys in the household survey declined from 90% in 2019 to 67%, but that survey impacts the unemployment rate not the 258,000 job revision in payrolls. And the media also attributed the poor response rate to federal job cuts. However, this is nonsensical since numbers are reported by individual state departments of labor, where July’s report shows that jobs increased! We would also note that the BLS website shows that the response rate for the establishment job survey fell from 69% in 2015 to 42.6% in March 2025 and the household survey response rate fell from 88% to 68% in the same period. See page 4. This is one of the main weaknesses in the jobs data and the responsibility resides with the state agencies.

First, it is important to understand that both surveys are samples, and from this sample, an algorithm estimates the monthly numbers. And like all models, it will also provide the statistical error factor. In the household survey this statistical error factor is 600,000 and in the establishment survey it is 136,000. This means that the estimate of 73,000 new jobs in July falls within a “confidence range” of plus 209,000 to negative 63,000. This may shock most people; but it has always been true.

All in all, there are four adjustments made to employment data and as the BLS noted last week, seasonal adjustments were revised in the July report. Three adjustments are made to the surveys each month: seasonal adjustments, additional or revised survey data, and the birth death adjustment. First, there is a strong seasonal pattern of job losses in July (education/summer recess) and January (private sector layoffs) and the seasonal adjustment smooths this trend. Seasonal adjustments are revised regularly, as new data is accumulated. In our opinion, BLS mathematicians should have ignored data from the pandemic period since the mandated shut down of businesses disrupted all the normal seasonal patterns. However, this was not done, and seasonal adjustments have become problematic in the aftermath. See page 6. Second, data trickles in with a lag, so numbers are revised once new data is reported. Third, the birth death adjustment is used to adjust for the number of jobs added by business creation or jobs lost due to business closures. This data is not captured by the states in a timely manner, so a birth death adjustment is derived from historical information. Note that the estimate of births and deaths is applied to the not-seasonally-adjusted number and in July it added 257,000 jobs. (The not-seasonally adjusted establishment number in July was a loss of 1.05 million jobs.) The fourth adjustment to the data is a quarterly and/or annual revision to population estimates which comes from the Census Bureau. There will be a quarterly census adjustment to data in September. In sum, understanding how the data is created can be daunting, but using the data can be perilous for the uninformed.

The negative revisions in the establishment survey to the months of May and June severely damaged the trends in the jobs data. Whereas, the 3-month average of job creation had been 126,670 in April, it fell to 35,330 in July. In our opinion, when the 3-month average of job creation is over 100,000 it represents a good job market and when it exceeds 250,000 it defines a very strong job market. Conversely, a negative 3-month average of job creation has historically been a sign of a recession. This is what makes the sharp decline over the last three months so ominous. Although both the establishment and household surveys show job growth to be positive year-over-year, both trends are now below average and declining. While the 3-month average in the household survey can be quite volatile, it fell into negative territory in July! In short, the changes seen in the July jobs report were significant and have a distinct recessionary tilt. August’s employment report, released in September ahead of the FOMC meeting, will be important in terms of clarifying the weakness now appearing in the job market. See page 7.

Unemployment rates by level of education were particularly interesting in July. They show unemployment rates rising for high school and college graduates but falling for those with less than a high school degree and for those with some college or an associate degree. Note that the labor force for those with a bachelor’s degree is the largest and it nearly equals the sum of high school and associate degree graduates. It is nearly eight times as large as those with no high school degree. Moreover, it is an important category and typically has the lowest unemployment rate of all categories. In July the unemployment rate for those with a bachelor’s degree rose to 3.1% while the rate for those with an associate degree fell to 3.0%. It was an unusual convergence of unemployment rates. See page 9.

The ISM manufacturing index was 48.0 in July, down from 49.0 and most all components, with the exception of prices paid to suppliers, were below 50, an indication of contraction. The brightest spot in July was the increase in production from 50.3 to 51.4. The nonmanufacturing survey inched lower to 50.1 showing a tepid expansion. However, the employment indices were most important. The employment index for nonmanufacturing was below 50 for the fourth time in the last five months. As a result, both surveys show employment to be under 50 and contracting. See page 13. This is another indication that the job market may be weakening.

There were positive economic reports this week such as the second quarter PCE index at 2.1% (page 10) and a 3.0% increase in second quarter GDP (page 11). Second quarter earnings releases continue to beat expectations and consensus forecasts for 2025 and 2026 continue to rise. However, the real driver of equity prices in August may be the expectation that the fed funds rate will be cut at the September 16-17 meeting. History suggests that stocks rise in the months following the first rate cut, particularly if it is the first of a series of rate cuts. In short, despite the weakness seen in revised jobs data, the equity market is expected to be higher in the second half of the year.

Technical indicators have been bullish since May. Our 25-day up/down volume oscillator has not confirmed the new highs recorded in August, which suggests there could be a near-term pullback in the indices, but we would be a buyer on dips.

Gail Dudack

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