Weekly Investment Update (08/07/2026)

U.S. equities continued to rise this week, led by a strong rebound in technology and semiconductor stocks. The S&P 500 reached a record high for the first time in two months. Over the five trading sessions ending Wednesday, the S&P 500 gained 6% and the Nasdaq rose 9%, one of the strongest rallies in 70 years. The move suggests investors are becoming more willing to look past potentially higher-for-longer interest rates and instead focus on solid earnings and continued optimism around AI-driven growth.

Currency developments, which we discuss in more detail below, added an unusual macro dimension. Treasury Secretary Scott Bessent led the first joint U.S.-Japan currency intervention in nearly three decades to halt the yen’s slide after it weakened to nearly ¥164 per dollar, its lowest level since 1986. One concern was that, had Japan continued defending the yen on its own, it might have needed to sell some of its U.S. Treasury holdings, potentially putting upward pressure on Treasury yields.

Friday’s employment report was materially weaker than expected, signaling a sharper loss of labor market momentum. Nonfarm payrolls declined by 23,000 in July, compared with expectations for an increase of roughly 80,000, while June payroll growth was revised down to 20,000. However, the unemployment rate edged down to 4.1% from 4.2%, largely because labor force participation declined further. The combination of outright job losses and substantial downward revisions should reduce concerns that the Federal Reserve (Fed) may raise interest rates further. However, as we discuss below, the key will be the next two inflation reports and the August jobs report ahead of its mid-September meeting.

Weak Headline Job Growth Has Little Impact on Fed Outlook 

What is happening: The July jobs report came in below expectations, with payrolls declining 23,000 despite the unemployment rate falling to 4.1% from 4.2% in June. The weakness in headline payrolls was concentrated in government jobs, driven by a decline of 50,000 local education jobs that may partly reflect fading back-to-school seasonal effects. Leisure and hospitality employment also fell by 40,000, likely reflecting a reversal of temporary World Cup hiring. Job growth in May and June was revised lower, reducing the three-month average gain to 20,000 jobs. As with July’s report, much of the downward revision reflected weaker government hiring. In contrast, private sector employment remained relatively resilient, with jobs increasing by 30,000 in July, led by construction and healthcare, suggesting underlying labor demand remains resilient.

The modest decline in the unemployment rate largely reflected another drop in the labor force participation rate, which has fallen to its lowest level since 2021. With fewer people participating in the labor force, the unemployment rate can decline even when job creation slows. At the same time, average hourly earnings, or wage growth, slowed to 3.2%, its weakest pace since 2021. Both figures suggest that the decline in unemployment does not reflect a meaningful tightening in labor market conditions and that wage-driven inflationary pressures remain limited.

Why it matters: The Fed has maintained that the labor market is broadly in balance and not currently a source of inflationary pressure. Today’s report does little to change that assessment. While the headline payroll decline appears concerning, the underlying pace of hiring does not suggest a sharp deterioration in labor demand. The balance of labor market data — low layoffs, improving employment surveys, and stable job openings — suggests a pickup in payrolls in August. The ratio of vacancies to unemployment, a measure of labor market tightness, remains above 1, well above cycle lows. 

Still, the July jobs report may give Fed officials pause as they consider a near-term hike. Fed policy has turned increasingly data dependent such that each meeting going forward is live, should the data warrant. Today’s data has lowered odds of a September hike to below 50% vs roughly 60% in recent weeks. As implied by Chair Warsh’s recent communications, if markets are pricing greater than a 50% chance of a 25-basis-point hike at the time of the next meeting, the Fed is likely to commit to that pricing and hike rates. As a result, the next two inflation reports and the subsequent August jobs report will be key to determining the outcome of that decision. With jobs data likely to rebound next month, we still cannot rule out a September hike. However, today’s report raises the bar for additional tightening. 

The U.S. and Japan Stage a “Yentervention”

What is happening: The U.S. and Japan recently coordinated to support the Japanese yen after it weakened to its lowest level against the U.S. dollar in roughly four decades. The intervention helped strengthen the currency from approximately ¥164 per dollar to as strong as ¥155. Officials from both governments described the intervention as an example of close cooperation between long-standing allies.

The last time the U.S. intervened to strengthen the yen was during the 1998 Asian financial crisis. The last coordinated intervention between the two countries occurred following the Fukushima disaster, when policymakers sought to weaken the yen to support Japan's economy.

The yen's prolonged weakness has been driven by several factors. Japan continues to maintain lower interest rates than most developed economies, even as inflation has picked up, resulting in negative real interest rates. Japan also carries a high debt-to-GDP ratio, and the current government has signaled its intention to pursue additional fiscal stimulus, raising investor concerns about the country’s fiscal outlook. 

Low rates have also fueled one of the market's most popular carry trades, in which investors borrow (or short) yen to fund investments in higher-yielding currencies and assets. This strategy has created persistent selling pressure on the Japanese currency.

Why it matters: Large and rapid currency moves can create financial instability that often extends beyond foreign exchange markets. By acting together, the U.S. and Japan hope to reduce volatility in the yen while also encouraging investors to unwind some of the sizable short-yen positions that have accumulated through carry trades.

Direct U.S. intervention in foreign exchange markets is uncommon and generally reserved for periods of significant financial stress. While Treasury Secretary Scott Bessent framed the action as one ally helping another, the U.S. likely had its own economic incentives. A persistently strong dollar makes American goods less competitive abroad, running counter to the administration's goal of strengthening U.S. manufacturing and exports. Additionally, the Japanese government has traditionally defended the yen by selling a portion of its substantial U.S. Treasury holdings and using the proceeds to purchase yen. However, those Treasury sales can push U.S. bond yields higher, increasing borrowing costs for the U.S. government and the broader economy. Reportedly, the U.S. Treasury instead sold euros to purchase yen and provided Japanese authorities with the ability to borrow dollars against their Treasury holdings. This approach allowed Japan to support the yen without creating meaningful selling pressure on U.S. Treasuries.

While intervention helps stabilize the yen in the short term, a more durable solution would likely require the Bank of Japan to adopt a meaningfully more hawkish monetary policy. Higher interest rates could help narrow the yield gap between Japan and other major economies, help contain inflation, make the yen more attractive to investors, and reduce the incentive to use it as the preferred funding currency for carry trades. 

More broadly, the intervention illustrates that policymakers are increasingly willing to act before market dislocations become crises. Investors should view coordinated currency actions as a signal that authorities are focused not only on exchange rates, but also on preserving broader financial stability.