Bullish indicating open at $55-$60, IPO prices at $37
Trade policy continued to dominate market conversations this past week as the Trump administration’s full tariffs took effect early Thursday morning. Imports from most countries now face 10 percent levies, and some key trading partners pay much higher taxes on their exports to the U.S.; for example, goods made in China face tariffs of 30 percent.
In addition, President Trump announced this week that imports from India and Brazil would be taxed at 50 percent—the former as punishment for India’s ongoing purchases of Russian oil and the latter in response to what the president considers Brazil’s unfair treatment of former Brazilian leader Jair Bolsonaro. The administration also threatened to boost tariffs on the European Union to 35 percent, up from the recently negotiated level of 15 percent, if the bloc fails to meet its commitments for investment in the United States. The overall effective tariff rate stands at 18.6 percent as of August 7, up from between 2 percent and 3 percent at the start of the year, according to the Yale Budget Lab.
To this point it has been difficult to estimate tariffs’ impact on economic growth and inflation, given the complexity of global economics, the Trump administration’s frequently shifting policies, and the effects of other key changes. For example, recently enacted tax cuts and reductions in regulation may help offset the economic headwinds from tariffs. That said, signs started to emerge in June that tariffs were having negative effects on hard economic data. Most notably, the jobs report released Friday, August 1, was much weaker than expected and included major downward revisions to previous months’ job numbers. Despite the controversy over the latest jobs report, other recent economic data has been consistent with a slowing labor market.
One key question has been the extent to which tariffs’ impacts on goods would filter into the services economy, which makes up roughly 70 percent of U.S. gross domestic product (GDP). Data out last week from the Institute for Supply Manufacturing (ISM) Services Purchasing Managers Index (PMI) showed that the services economy weakened in July as price pressures rose, indicating that tariffs may be starting to extend beyond goods and affect the services sector.
The Federal Reserve has held off on reducing interest rates out of concerns about stoking higher inflation. After the Fed’s July meeting, Chair Jerome Powell noted that the still solid economy and job market made it possible for the rate-setting committee to take a wait-and-see approach on rates. Policymakers have been divided, however: In July, Fed governors Christopher Waller and Michelle Bowman dissented from the decision to leave rates unchanged, the first time in more than 30 years that two governors cast dissenting votes.
Recent weakness in jobs data has convinced the options markets that the Fed won’t wait much longer. As of Thursday, August 7, the Chicago Mercantile Exchange’s FedWatch Tool estimated a better than 90 percent probability of a rate cut at the Fed’s meeting on September 17. San Francisco Federal Reserve President Mary Daly gave credence to that view in comments Wednesday, saying the Fed may need to cut interest rates soon to support the labor market. Daly expressed the belief that the jobs picture currently presents a greater risk than inflation. She asserted that tariffs may lead to a one-time step-up in prices rather than a persistent inflation increase—echoing some of Powell’s remarks after the last Fed meeting—and said she expects that current monetary policy and weakness in the economy ultimately will drive inflation down. “The labor market has softened,” she said, “and I would see additional slowing as unwelcome, especially since we know that once the labor market stumbles, it tends to fall quickly and hard. All this means that we will likely need to adjust policy in the coming months.”
The U.S. equity market largely shrugged off concerns about tariffs and the economy last week, rebounding from the previous Friday’s sell-off. Gains were powered by rising expectations for a September rate cut and strong earnings, especially from prominent tech companies. The earnings season has been solid overall, with S&P 500 companies’ earnings per share rising 11.8 percent year over year in the second quarter. More than 80 percent of companies posted positive earnings surprises as of August 8, with 90 percent of companies reporting, according to FactSet.
Investors seem to be betting on upcoming interest rate cuts and counting on them to counteract the drag from tariffs. We think it is too early to make that assumption. The degree of tariff impacts and how long they will take to work through the economy remain open questions. In the meantime, high equity valuations may heighten the impact any negative developments have on stock returns.
The economic and market landscape is changing quickly and unpredictably. At times of great change, it is important to remember that the financial markets are always influenced by countless variables that are in constant motion. Uncertainty is a fundamental characteristic of the financial markets, and it is central to the potential for investment growth—it is a feature of investing, not a bug. A diversified portfolio that is tailored to your particular needs, goals and circumstances can capture a wide range of opportunities and guard against a wide variety of risks without requiring you to predict them.
Wall Street Wrap
Trade balance falls: The U.S. trade balance declined 16.0 percent in June, pulled down by a steep decline in companies’ imports of consumer goods. This result was not a surprise: It was consistent with the previous week’s release on second-quarter economic growth, which showed that a decline in imports boosted GDP. Imports surged earlier in the year as U.S. consumers and businesses hurried to buy foreign goods before tariffs hit; that stockpiling, coupled with tariffs, reduced demand for imports in June.
The deficit on goods fell 10.8 percent, a direct result of the Trump administration’s higher levies on imports. The trade gap with China fell to its lowest level since 2004, and trade deficits with Canada and Germany declined as well. These results clearly demonstrate that tariffs are affecting trade in meaningful ways that will affect the U.S. and global economy for months and likely years to come.
Consumer credit and delinquencies rise: Two separate reports released last week painted a picture of a consumer continuing to spend but increasingly being impacted by higher prices, increased debt levels and heighted interest rates. The Federal Reserve released its Consumer Credit Report Thursday. It showed that consumer borrowing rose 2.3 percent in the second quarter as consumers continued to spend amid higher prices and elevated borrowing costs. A similar report from the Federal Reserve of New York, the Household Debt and Credit Report, showed that average delinquency rates remained elevated, with 4.4 percent of overall outstanding consumer debt in some stage of delinquency in the quarter, up from 4.3 percent in the first quarter of the year and 3.2 percent from the same quarter a year earlier, indicating that more borrowers were having trouble making their payments.
New signs of softening in services: The ISM Services PMI fell from 50.8 to 50.1 in July, suggesting that growth in the domestic services sector slowed. (Readings above 50 are consistent with expansion; readings below 50 indicate contraction.) Economists had forecast an increase to 51.5. The report’s employment index fell from 47.2 in June to 46.4 in July, implying a steepening contraction in the services labor market.
In a worrisome sign for possible inflationary pressures as tariff impacts work their way into the broader economy, the prices paid index hit its highest point since October 2022, and respondents highlighted that higher costs caused clients to cancel or postpone projects. When combined with the prior week’s ISM Manufacturing Index, these releases show a U.S. economy and labor market that have slowed as price pressures have risen.
Continued jobless claims increase: The number of new jobless claims increased to 226,000, seasonally adjusted, during the week ending July 26. This was the highest number of Americans filing new unemployment applications in a month and more than the 221,000 economists expected. The increase was relatively modest, however, suggesting that employers are not resorting to widespread layoffs.
Perhaps more important, continued claims—the number of people who received benefits after their initial week of aid—rose to 1.974 million, the highest level in almost four years. The increase indicates that out-of-work Americans are taking longer to find new jobs. Continued jobless claims had stabilized between 1.8 million and 1.9 million from June 2024 to April of this year, but they have risen markedly since then, implying deterioration in the jobs picture. The increase in continuing claims is likely to strengthen the hand of Federal Reserve officials advocating for lower rates to support the labor market.
The Week Ahead
Thursday: The Producer Price Index (PPI) for July will be released Thursday morning. Coming on the heels of the July CPI report, it will provide a fuller picture of the ways inflationary pressures are filtering through the economy. By illustrating companies’ input costs, the PPI can offer signs of the likely trajectory of consumer prices.
Initial and continued jobless claims will come out Thursday morning as well. We are monitoring jobless claims for clues about the health of the labor market, with a particular focus on continued claims.
Friday: This is a fairly busy day for economic data releases. The U.S. Census Bureau will provide its Advance Retail Sales report, which should provide insight into consumer spending and behaviors. Retail sales were surprisingly strong in June. We will be watching to see if that trend continued in July or if retail sales data adds to recent evidence of softening in the consumer economy.
Also on Friday, the University of Michigan issues its preliminary report on August consumer sentiment and inflation expectations. Consumer sentiment was negative but improving in July, while expected inflation fell and households’ expectations for their own finances worsened. The consumer has been key to the U.S. economy’s resilience to this point. We will look to see whether that trend appears to be changing.
The Federal Reserve will release July data on industrial production and capacity utilization on Friday. We expect to see tariff impacts leading to a slowdown in manufacturing. The U.S. Census Bureau will report on April housing starts and building permits, offering clues about the health of the housing sector amid rising input costs and elevated interest rates.