Tariff tensions and a rough end to the week for Wall Street
Summary
Many expected last week’s news to focus on President Trump’s August 1 tariff deadline and related lawsuit, the Federal Reserve meeting, and GDP and PCE data. Instead, Friday’s weak job report dominated headlines. The report, which showed that employers added just 73,000 jobs (vs. 115,000 expected) and revised May and June numbers, influenced stocks, sparked a bond rally, and shifted market expectations for Federal Reserve rate cuts from one in October to one at each of the remaining Fed meetings in 2025.
The S&P 500 experienced a slight downward trend earlier last week, which accelerated significantly following Friday’s jobs report, resulting in a decline of 2.36% on the week. Likewise, the 10-year Treasury yield decreased by 19 basis points to close at 4.23%, with 15 basis points of this decrease occurring on Friday following the release of the employment data.
Liberation Day 2.0
President Trump raised tariff rates on multiple U.S. trading partners effective August 1 or August 7. The tariff rate on Canadian goods increased from 25% to 35% on August 1, with President Trump citing border and trade issues. Mexico secured a 90-day extension on potential tariff increases, but existing tariffs (ex. 25% on autos, 50% on copper/aluminum/steel) remain in place for now. However, the vast majority of Canadian and Mexican imports are covered under the US-Mexico-Canada Agreement, which is subject to lower tariff rates. India’s tariff will be 25% plus penalties for Russian ties. Last-minute agreements with the EU, Japan, South Korea, Vietnam, and the Philippines set lower, but still substantial, tariff rates.
Companies like Apple and Amazon have warned of significant impacts and persistent legal challenges, with courts questioning whether the President's actions exceed authority — a dispute likely headed for the Supreme Court.
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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Key economic releases and a Fed meeting
As anticipated, the Fed kept its benchmark rate at 4.25%-4.50% in its July meeting, despite President Trump's push for a rate cut. For the first time since 1993, two Fed governors, Michelle Bowman and Christopher Waller, dissented, supporting a 25 bp rate cut.
On Wednesday, the GDP advance estimate reported 3.0% annualized growth in Q2, rebounding from a 0.5% decline in Q1 and surpassing the 2.5% forecast. Growth was driven by lower imports and higher consumer spending, while private investment, exports, and government spending declined.
The PCE index indicated an uptick in June, with many claiming that tariffs are beginning to impact pricing. Headline PCE rose by 2.6% on an annualized basis, while Core PCE increased by 2.8%.
The week ahead
This week’s key economic data includes the trade balance data and ISM Services on Tuesday, and initial jobless claims and the monthly consumer credit report on Thursday.
Disclaimers
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