Stock gains and a new Fed nominee
Summary
Trade policy uncertainty has morphed into tariff pass-through uncertainty. President Trump’s nomination for a new Fed Governor buys him time to decide on Jerome Powell’s replacement. New production data shows diverging views on the economy.
The S&P 500 advanced by 2.44%, recovering from losses experienced in the previous week. Nonetheless, returns among individual companies have been uneven, with specific themes, such as AI exposure and indicators of “quality,” like robust balance sheets and high profit margins, demonstrating outperformance, according to a Goldman Sachs report. The 10-year Treasury yield remained largely stable throughout the week before rising 4 basis points on Friday to 4.27%.
Tariff pass-through uncertainty
While trade policy uncertainty is fading as more countries reach agreements with the U.S., tariff pass-through uncertainty has emerged. The effective tariff rate for American consumers stands at 18.3%, averaging $2,400 in annual household income loss, the highest since 1934, according to The Budget Lab at Yale. It remains unclear how much of these tariffs companies will absorb versus pass on to consumers. Historically, tariffs have mostly passed through, but economists expect that low- and middle-income buyers may shift their spending, prompting importers to reconsider raising prices or accepting lower margins.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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The Fed
This week’s Fed dynamics shifted after Trump nominated Stephen Miran, the current Chair of the President’s Council of Economic Advisers, as Fed Governor. Pending Senate confirmation, Miran will serve for the remainder of outgoing Governor Adriana Kugler’s term. Despite a weak jobs report supporting expectations for rate cuts, persistent inflation could change this outlook. Most anticipate a 25 bp cut in September and up to two more by year-end, although some, including Bank of America, expect no further cuts due to potential stagflation risks.
Economic growth
Last week, the PMI survey showed business activity rising from 52.9 in June to 55.7 in July, while the ISM composite slipped from 50.8 to 50.1; both remain above 50, signaling growth. Inflation is still a concern, as most merchandise sold predates import duties. Export orders were weak in both reports.
The week ahead
U.S. inflation takes focus with Tuesday's July CPI report, while retail sales and University of Michigan sentiment index will follow on Friday.
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