Trade tensions weigh on Wall Street despite modest losses
United States (US) equity markets closed lower last week as trade tensions resurfaced on Monday and intensified throughout the week.
For the week:
These modest declines likely reflect the widely held view that tariff threats are primarily a negotiation tactic designed to pressure trading partners into finalising trade agreements.
Global tariffs escalate as US targets major trade partners
To recap, last week began with ‘tariffs in letters’ sent to mostly minor trading partners (apart from Japan and South Korea), before tensions escalated with a sharp increase in Brazil’s tariff rate, threats of baseline tariffs of 15% – 20%, and the announcement of a 35% tariff on Canada.
After markets closed on Friday, President Trump announced a 30% tariff on imports from Mexico and the European Union (EU), effective 1 August. It is worth noting that, together, Canada, Mexico and the EU account for roughly 45% of all imports into the US.
In the unlikely event that there is no reduction in the tariffs announced last week, the average tariff rate is expected to rise to nearly 25%, up from the current rate of around 14%. This would have serious implications for growth, inflation, and consumer and business confidence. However, this impact will not fully materialise in economic data until September and October, with the relevant releases due in October and November.
Earnings, Fed speakers and inflation data in focus this week
Looking ahead, aside from monitoring tariff headlines, this week’s focus will be on earnings reports from major banks including JP Morgan Chase, Goldman Sachs and Bank of America, as well as Netflix and 3M. The consensus expects US 500 earnings per share (EPS) growth of 4.8% – 5.2% in the second quarter (Q2), which is well below the 12% year-on-year (YoY) growth seen in the first quarter (Q1), and a benchmark that corporate America should clear with ease.
Elsewhere, speakers from the Federal Reserve (Fed) – including Bowman, Barr, Barkin, Collins, Logan, Hammack, Williams, Kugler, Cook and Waller – are scheduled to speak ahead of the blackout period before the Fed’s July meeting. There will also be strong interest in Tuesday’s consumer price index (CPI) report for June, previewed below.
CPI
Date: Tuesday, 15 July at 10.30pm AEST
In May, the headline inflation rate rose 0.1% month-on-month (MoM), which saw the annual rate of headline inflation increase for the first time in four months to 2.4%, up from 2.3%. Core inflation also rose 0.1% MoM, with the annual rate holding steady at 2.8% year on year (YoY) for a third consecutive month. This was below forecasts, which had predicted a rise to 2.9%.
The minutes from the June meeting of the Federal Open Market Committee (FOMC) were released last week. The minutes reaffirmed the belief that interest rates are ‘well positioned to wait for more clarity’. Participants noted that increased tariffs would likely place upward pressure on prices, with ‘a few’ indicating tariffs would cause a one-off price increase, but ‘most’ highlighting the risk of more persistent inflationary effects. ‘Most’ participants felt a rate cut this year would be appropriate, with ‘a couple’ open to cuts as early as the next meeting. However, ‘some’ participants saw no cuts this year, citing ‘meaningful’ upside risks to inflation.
For June, the preliminary expectation is for headline inflation to rise 0.3% MoM, with the annual rate increasing to 2.7%. Core inflation is also expected to rise 0.3% MoM, which would lift the annual rate to 3% – the highest since February. This rise is largely expected to reflect the effects of tariffs and is not anticipated to trigger a period of sustained volatility.
The US interest rate futures market is currently pricing in 18 basis points (bp) of Fed rate cuts for the September FOMC meeting, with a cumulative 52 bp of cuts priced in between now and the end of the year.