Trump to the world: To whom it may concern
Summary
Trade tensions escalated last week with Trump proposing widespread tariff increases affecting over 50 nations. A Trump Fed appointee proposed a 25 basis point rate cut in the Fed’s next meeting at the end of July, but the market isn’t counting on any changes until September. New CPI and PPI data provide an interesting look at how the economy is digesting tariffs. The S&P 500 gained 0.61% last week resulting in 1.54% increase in July, while the 10-year Treasury yield was mostly flat, gaining 1 bp to end at 4.44%.
U.S. trade policy and interest rates
Last week, President Trump proposed specific and significant tariff increases. His “letter” campaign sent declarations of so-called reciprocal tariffs to over 50 nations with promises to increase that number in the coming days. Proposed baseline tariffs increased from 10% to 15-20% for “non-deal” countries, and even higher rates on specific sectors. A 50% copper tariff gained a lot of press last week.
If tariffs were the top political story last week, the Fed was second. Will Trump fire Jerome Powell before his term ends in May 2026? Will a successor be named earlier than typical, effectively creating a prolonged “lame duck” period for Powell? Only time will tell. In the meantime, Fed governor Christopher Waller advocated this past week for a 25 bp rate cut at the July 29-30 meeting. He believes that tariffs will be a one-time price level increase but have limited long-term impact on inflation. GDP growth is below potential. At 4.1%, unemployment is near the Fed’s long-run estimate of 4.2% and PCE inflation is 2.3%, only slightly above the Fed’s 2.0% target. Private payroll growth, per Waller, is near stall speed with potential downward revisions. Other Fed governors, including Daly, Williams, and Hammack, prefer a more cautious approach. The market is projecting a 25 bp rate cut in both the September and December Fed meetings, bringing the target range to 3.75%-4.00% by year end.
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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1-month Term SOFR swap rates
1-month Term SOFR swap rates reflect the rate to swap a Term SOFR indexed loan with monthly interest periods and payments and an Act/360 day count to a fixed rate. These rates do not include transaction specific mark ups and may not match swap rates for loans that use other SOFR base rate variations.
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Key economic releases
The CPI continues to run on the softer side of expectations, given the looming risks from tariffs. In last Monday’s release, headline CPI rose 0.29% in June, with core CPI up 0.23% (forecasted at 0.29%). Year-over-year headline and core CPI were 2.7% and 2.9%, respectively.
The producer price index for final demand, released last Wednesday, was surprisingly unchanged in June, with goods prices rising slightly (0.3%), but offset by a slight decline in services prices (-0.1%). Year-over-year in June, PPI increased 2.3%. This suggests that tariffs continue to pass through to consumers. The market is anticipating how this trend will show up in the next PCE data release at the end of July.
The week ahead
This week will be light on data releases, with the major release being the durable goods report on Friday (consensus is -10.8%). Thursday’s initial jobless claims are expected to be 230,000 and continuing jobless claims expected at 1.96 million. The Fed is in its blackout period.
