From Calm to Chaos: Markets Whipsaw as Powell Shakes September Hopes
This final Sunday morning on Crete carries the bittersweet tang of endings: my last breakfast beneath these olive groves, the cicadas already quieter in the August heat, and somewhere beyond the azure horizon, global markets wrestling with the sobering reality that September rate cuts … like the fading Aegean summer … may not arrive quite as promised or perhaps … they will ….
Whilst preparing to bid farewell to this island sanctuary, Jerome Powell bid his own farewell; to hopes of an easy September rate cut. His hawkish press conference on Wednesday sending markets reeling, only for Friday's dismal jobs report to completely reverse the narrative, how bittersweet.
So, like the Aegean winds that can shift from calm to tempestuous in minutes, market expectations whipsawed from disappointment to desperate hope within just 48 hours! So what else unfolded this week just ended?
Recap: Where We Left Off (Week 30)
Last week saw markets drift higher in soft summer volumes: the S&P 500 and Nasdaq notched quiet highs, while policy talk swirled louder than equity order books. The Fed's "will they/won't they" act saw the odds of a September rate cut fade from 71% to 61%, while Private Equity weighed the frustrations of record dry powder against threadbare deal flow.
If you missed the last dispatch: Deploy or Drift: Private Equity’s Strategic Summer Pause
This Week: The Hawkish Shock and Economic Reality Check
US & Global Equities
· S&P 500 and Nasdaq: Markets whipsawed from Powell's Wednesday hawkishness (-1.2% intraday) to Friday's jobs-driven selloff (-2.1% and -2.6% respectively). Tech rotation accelerated as rate-sensitive growth names bore the brunt.
· Europe: FTSE 100 (-0.1%) and DAX (-1.8%) showed defensive characteristics amid global uncertainty. Tariff concerns weighed on European exporters, while UK gilt yields plunged 15bp on Fed pivot expectations.
· Emerging Markets: MSCI EM index -1.2% as Trump's renewed tariff threats offset China stimulus hopes. Brazilian equities held steady despite central bank pause, while Indian markets corrected -2.1% on geopolitical concerns.
Gold and Digital Assets
Gold: Flat performance (-1.5%) despite week's volatility suggests investors remain sceptical of sustained market stress. Caught between safe-haven demand and rising real yields as Fed pivot expectations fluctuated wildly.
Crypto: Bitcoin -8.2% to $62,000, reinforcing correlation with risk assets rather than serving as portfolio hedge. Genesis distributions and Mt. Gox liquidations added technical pressure, contradicting uncorrelated asset narratives.
Macro & Policy
· Fed Policy Whipsaw: Powell's Wednesday hawkish stance ("no decisions about September") sent rate cut odds crashing from 65% to 38%, only for Friday's jobs catastrophe (73k vs 117k expected) to rocket them to 69%. Most dramatic intraweek reversal in recent memory.
· Labour Market Inflection: Unemployment rose to 4.3%, highest since October 2021. Manufacturing employment declined 1.2% annualized while prior months saw devastating 818k downward revisions. Clear inflection from tight labour market conditions.
· Global Manufacturing Contraction: US PMI fell to 49.5 from 52.9, China's Caixin PMI slipped below 50. Synchronized weakness across major economies coincides with Trump's escalating tariff campaign (10-41% rates on dozens of countries).
· Central Bank Divergence: ECB held steady amid "exceptional uncertainty" while Fed contemplates emergency cuts. Two FOMC governors dissented for cuts—first dissent in 30+ years. Policy divergence creating currency volatility.
Other assets
Bonds: 10-year Treasury yield plunged 17bp Friday alone (4.39% to 4.22%) while 2-year crashed from 3.94% to 3.71%. Massive moves reflecting dramatic policy repricing and flight-to-quality demand.
Oil: WTI -0.5% to $78.28 as demand concerns offset supply tightness. Manufacturing weakness globally raises questions about energy consumption despite geopolitical tensions supporting prices.
Dollar: DXY +0.8% initially on tariff strength, but faded on revised rate cut expectations. Dollar weakness provided EM currencies breathing room amid Fed policy recalibration.
Weekly Market Table (Week 31)
What’s Pertinent This Week?
· Powell's Wednesday-to-Friday Reversal: The most dramatic 72-hour Fed policy recalibration in recent memory unfolded this week. Powell's hawkish Wednesday press conference, emphasizing "no decisions about September" and inflation persistence, sent rate cut odds crashing from 65% to 38%.
Yet Friday's employment catastrophe; just 73,000 jobs added versus 117,500 expected, with devastating 818,000 downward revisions to prior months; obliterated that narrative within hours. Markets immediately repriced September odds up to 86%, creating one of the largest intraweek policy expectation swings on record.
· Private Equity's AI Acceleration: The most significant development beneath market volatility may be PE's embrace of artificial intelligence. Some 82% of PE/VC firms now actively deploy AI which is up from 47% the previous year; for deal sourcing, due diligence, and portfolio optimization.
This isn't just efficiency enhancement; it represents a fundamental shift toward data-driven investment decisions that could reshape competitive advantages. EQT's 'Motherbrain' platform and Blackstone's predictive analytics exemplify how technology enables superior risk assessment in volatile environments.
· Manufacturing Recession Goes Global: The synchronized contraction across major economies signals more than cyclical weakness. US Manufacturing PMI collapsed from 52.9 to 49.5, while China's Caixin PMI slipped below the 50 expansion threshold.
This isn't merely about inventory adjustments but it reflects fundamental demand destruction as Trump's escalating tariff campaign (10-41% rates on dozens of countries) creates uncertainty that paralyzes capital allocation decisions. Corporate buyers are scrambling for strategic acquisitions before trade barriers solidify further.
· Labour Market Inflection Point: Friday's employment data revealed more than headline weakness. The unemployment rate's rise to 4.3% which is the highest since October 2021, masks compositional changes that suggest structural shifts. Manufacturing employment declined 1.2% annualized while private sector job growth slowed to just 0.5% over three months.
This represents a clear departure from the tight labour conditions that have characterized the post-pandemic recovery, potentially forcing the Fed's hand regardless of inflation concerns.
Private Equity's Macro Insights
Dry Powder: Still Parched, Still Patient
Despite the fading blue-water views behind me, PE's disciplined approach appears increasingly prescient as economic headwinds gather. The $2.515 trillion in global dry powder (while down from 2023's peak) still represents unprecedented firepower awaiting deployment. However, patience remains the watchword: 24% of buyout fund dry powder was raised four or more years ago, creating pressure for deployment while maintaining investment discipline.
The median holding period has reached a record 5.8 years as firms delay exits amid uncertain conditions. Fund life extensions have become standard practice, with 63% allowing GPs to authorize the first extension at sole discretion. The message remains clear: it's the diligent, not the desperate, who'll prevail when market tides finally turn.
Private Credit: The Safety Valve
Private credit continues serving as the release valve for constrained bank lending, with direct lending volumes rising despite broader market volatility. Middle-market spreads have stabilized around SOFR+525-575bps, providing attractive risk-adjusted returns in an environment where traditional credit markets remain cautious. The asset class benefits from the Fed's policy uncertainty, as floating-rate structures offer protection against potential rate volatility.
Covenant-lite structures remain prevalent, yet underwriting standards have tightened as lenders prepare for potential economic softening. The focus has shifted toward defensive sectors and cash-generative businesses capable of servicing debt through various economic cycles.
Digital Asset Infrastructure: The Quiet Gold Rush
The crypto infrastructure build-out continues beneath the surface volatility, with institutional adoption accelerating despite Bitcoin's -8.2% weekly decline. Spot ETF flows remained net positive, suggesting structural demand persists beneath cyclical pressure. However, the Genesis and Mt. Gox overhangs remind investors that digital assets remain nascent and illiquid during stress periods.
Private equity's approach to crypto infrastructure remains selective, focusing on picks-and-shovels strategies rather than direct token exposure. Custody solutions, payment rails, and regulatory-compliant trading platforms attract continued investment as the industry matures.
Interest Rates; Powell holds a still breeze ... still to change direction
Jerome Powell's Jackson Hole speech on August 23rd looms as the pivotal moment for policy clarity. Last year's address signalled rate cuts with "the time has come" messaging, but this year's theme … "Reassessing the Effectiveness and Transmission of Monetary Policy" … suggests deeper reconsideration amid conflicting signals.
The challenge is acute: balancing deteriorating labour conditions (4.3% unemployment, manufacturing declining 1.2% annualized) against persistent tariff-driven inflation risks. Markets now price high odds for September cuts, against which Powell must communicate data-dependent flexibility without appearing to capitulate to either market pressure or political demand.
The FT Article on Financial Repression: Summer Reflections on Easy Money
As summer's end approaches, the Financial Times' analysis of financial repression resonates from these Mediterranean waters. The hidden cost of cheap money i.e. asset price inflation divorced from fundamental value creation; becomes apparent as markets whipsaw on policy signals rather than economic substance.
The current environment exemplifies this dynamic: 31 percentage point swings in rate cut probabilities within 48 hours based on single data points, while underlying productivity growth and innovation proceed at their own measured pace. The lesson for investors: focus on companies and strategies that create value independent of monetary accommodation.
So this scenario is definitely not off the table, a watch and see is required.
Ed’s Final Word
As my Cretan sojourn draws to a close, this week serves as a perfect metaphor for today's markets: what appeared clear and predictable at dawn … Powell's hawkish stance, stable employment trends, orderly policy normalization … transformed into something entirely different by sunset. The September Fed cut that seemed dismissed on Wednesday became near-consensus by Friday's close.
The lesson transcends monetary policy: in an era of extreme interconnectedness and algorithmic amplification, single data points can trigger cascading re-evaluations of entire investment theses.
Private equity's evolution toward AI-enhanced decision-making and capability-focused acquisitions reflects a new reality. The firms thriving in 2025 will be those that can navigate the noise while maintaining discipline around genuine value creation. Like the ancient olive trees that have weathered countless Mediterranean storms, the most successful investors are those with deep roots and long-term perspective.
Week 31, 2025: The fading light over these Aegean waters reminds us that all cycles whether monetary, economic, and market, are transitory. What endures is the quality of businesses, the strength of management teams, and the wisdom to distinguish between temporary dislocations and fundamental shifts.
For further reading beside a sun-dappled terrace:
https://qz.com/powell-speech-jackson-hole-interest-rates-1851628879
https://www.cbsnews.com/news/federal-reserve-powell-trump-fomc-interest-rate-meeting-july-30/
https://www.ropesgray.com/en/insights/alerts/2024/08/us-pe-market-recap
https://www.barrons.com/livecoverage/fed-interest-rates-july-meeting-powell-today
https://www.investopedia.com/dow-jones-today-07292025-11780754
https://www.barrons.com/livecoverage/stock-market-today-072924
https://www.sharesmagazine.co.uk/news/shares/uk-stocks-end-frantic-week-with-steady-gains
