Markets show resilience in spite of increased trade uncertainty

U.S. trade policy and interest rates

On Monday morning, the Trump Administration sent letters to the leaders of Japan and South Korea, two key U.S. trading partners, implementing a 25% tariff rate effective August 1. The Administration released twelve additional letters that day and continued to release more throughout the week. President Trump also signed an executive order pushing back the deadline for trade agreements from July 9 to August 1. Many of the tariff rates are similar to what was announced April 2, however, Canada and Brazil drew additional ire from President Trump as he threatened higher rates on both countries. In all of the letters, the Administration left the door open to reexamine the rate if trade deals are reached by the deadline. Although the week brought renewed concerns, the deadline extension seems to be enough to keep the markets from a significant decline, like we experienced after the initial tariff announcement on April 2.

President Trump also made headlines with his comments regarding his frustration with Chair Powell. Through several Truth Social posts and multiple interviews, the President made it clear he believes the Fed should lower interest rates. Additional Administration officials have also been critical of Chair Powell to increase pressure on the Fed to lower rates. Yet, fed funds futures still show a low probability of a July rate cut. However, the markets may react if the President moves forward with his plans to name Chair Powell’s successor ahead of time. If the Fed does start to lower rates, it may not have the intended consequences. Historically, interest rates across the curve have moved in the same direction when the Fed cuts rates. However, given the current market dynamics, including the current levels of deficit spending and the potential tariff impacts, cutting prematurely could send long-term rates higher. We expect more rate volatility until the market gets more clarity on U.S. policy.

Key economic releases

Last week the NFIB Small Business Optimism index, the FOMC meeting minutes, and jobless claims were released. The NFIB index came in close to expectations with a reading of 98.6. The FOMC meeting minutes showed an increasingly divided committee with two officials calling for a potential rate cut as early as July and others calling for zero rate cuts this year. Finally, jobless claims came in below expectations at 227,000, which continues to point to a resilient labor market.

The week ahead

Both CPI and PPI are set for release this week. Economists will watch closely for any indications of tariffs reflected in the data, as the inflation reports over the past few months have been tame. Markets will also get a read on the consumer with retail sales and consumer sentiment. Investors will also look for any relief in the housing market, with housing starts and permits set to be released later in the week. Additionally, there will likely be plenty of headlines around U.S. trade policy as the President threatened higher tariffs on the EU and Mexico over the weekend.