Macro
Tariff tensions are rising again as President Trump threatens a sweeping new round of trade measures targeting multiple countries, including Canada and Brazil. Despite these renewed threats, investor sentiment has remained surprisingly resilient—buoyed by solid U.S. economic data and expectations of continued growth. Markets appear to have moved past peak uncertainty and are now pricing in a relatively healthy mix of growth, disinflation, and monetary policy normalisation.
While tariffs complicate the macro narrative, global disinflation remains largely intact. However, the inflationary impact of new U.S. tariffs threatens to disrupt this trend in uneven and asymmetrical ways. In the U.S., tariffs are expected to be inflationary, raising import prices and potentially reversing some of the recent progress made in reducing inflation. In contrast, export-driven economies may face deflationary pressures as reduced U.S. demand weighs on global producer prices.
Amid trade tensions, economic indicators in the U.S. remain solid. The labour market continues to show resilience, and the Atlanta Fed’s GDPNow tracker suggests growth is running around 2.6%. Inflation has eased to 2.3%, close to the Fed’s 2% target, supporting a wait-and-see approach from policymakers.
Some argue that as the U.S. population ages and declines, the pace of job creation may slow over time. However, after several years of labour market tightness and robust wage growth, job openings are now falling. There is approximately one job opening for every unemployed worker, which signals that the demand-supply balance has normalised. This shift is weakening employee bargaining power and could place downward pressure on wages, even as headline employment metrics remain healthy.
Recent labour market data suggest the U.S. economy remains on solid footing, with the Atlanta Fed’s real-time GDP tracker indicating growth of around 2.6%. Unemployment remains low, and corporate earnings are robust. These fundamentals, alongside expectations for policy normalisation, have helped offset concerns about escalating trade tensions.
The scale of proposed tariffs is striking. Trump has floated duties as high as 50% on Brazilian imports (reportedly in response to the BRICS summit hosted by President Lula), and has threatened a new 35% tariff on Canadian goods not covered by USMCA. Letters sent to at least 14 other countries outline further tariff plans, including 25% on imports from Japan and South Korea, 40% on Myanmar, and between 30% and 36% on nations such as South Africa, Thailand, and Indonesia. With these, average U.S. import tariffs, which were once around 2–3%, could rise to levels unseen in modern U.S. trade history, exceeding 16%.
One of the most consequential new tariffs is a proposed 50% duty on copper imports, justified by national security concerns. Copper, vital for energy and tech infrastructure, is now being treated similarly to steel and aluminium under earlier tariffs. Despite ample domestic reserves, the U.S.’s limited refining capacity makes it vulnerable to global supply disruptions. Following this announcement, copper prices surged to a record $5.70/lb, potentially fueling inflation but also encouraging domestic investment in processing facilities. These new measures, alongside other recently announced reciprocal tariffs, such as a 50% tariff on Brazilian goods and a 35% tariff on Canadian products, a new framework agreement with Vietnam, and the copper tariff, are contributing to a significant rise in overall U.S. tariffs. According to a July 11th report from the Yale University Budget Lab, the average U.S. tariff is now projected to reach 18.7%, up from 15.6% in early June. However, this estimate doesn’t yet include the recently declared 30% tariffs on EU and Mexican products.
Despite a wave of aggressive new tariff proposals, market reaction to Trump’s trade rhetoric has been muted. Investors appear increasingly desensitised to the threats, viewing them as more tactical than final, especially given past delays and walk-backs following market volatility. While the proposals resemble earlier sweeping duties introduced in April, history suggests that these measures may once again be renegotiated or postponed if financial markets respond negatively.
While the markets remain calm in the face of Trump’s latest tariff threats, some investors and executives warn that complacency is setting in. JPMorgan CEO Jamie Dimon has expressed concern that investor optimism might embolden the White House to escalate trade actions, potentially catching markets off guard. The prevailing belief is that Trump ultimately backs down, which is popularly dubbed the “TACO” trade (“Trump Always Chickens Out”). However, a more accurate interpretation is that Trump’s aggressive trade threats are intended as opening bids. A more generous view is that he begins negotiations from a position of strength to extract better terms before softening his stance.
Either way, this dynamic is now widely recognised and has helped sustain risk appetite. Still, past episodes of abrupt escalations and reversals suggest that such confidence may be misplaced. The so-called “Trump put” has provided a cushion, but some warn that relying on it too heavily could prove dangerous if political calculations shift.
Federal Reserve officials, including Chair Powell, have emphasised patience, even as political pressure mounts. Trump is once again pushing for rate cuts and reportedly preparing to name a successor to Powell (a topic we went over in detail last week). Former CEA Chair Austan Goolsbee, who was once supportive of rate cuts, has recently adopted a more cautious tone, reflecting the renewed uncertainty stemming from trade policy and its potential inflationary effects.
Alongside trade and monetary policy, Trump-era tax reforms continue to shape investment behaviour. While the capital gains tax rate remains at 23.8%, several provisions expanded investor incentives. These include permanent Opportunity Zones, enhanced startup stock exemptions under Section 1202, and a $15 million estate tax exemption. Collectively, these measures encourage long-term asset holding and offer significant tax deferral or avoidance opportunities to investors.
Given that U.S. interest rates remain higher than in many other developed markets—and that the Fed has been slower to cut, conventional wisdom would suggest a stronger U.S. dollar. Yet the greenback has underperformed, weighed down by trade-related uncertainty, fiscal risks, and growing political instability. The dollar has fallen over 10% year-to-date on a trade-weighted basis, marking the worst start to the year in over four decades. Despite solid fundamentals, the dollar’s recent weakness reflects how non-monetary factors, including tariffs and geopolitical frictions, are increasingly influencing investor behaviour.
Rates
Treasury yields rose this week alongside a noticeable steepening of the curve, while the dollar strengthened, gaining 1.0% on the DXY. Demand for Treasuries remained solid, suggesting that bond vigilantes may have temporarily stepped back. Despite continued heavy issuance from the U.S. Treasury, investors still find yields near 5% attractive—particularly those managing portfolios that need to balance risk exposures built up in recent years, such as in the booming private credit space.
This renewed demand likely reflects expectations that the Federal Reserve could begin cutting rates in September, with markets now pricing in roughly 50 basis points of easing this year. That shift is supported by the current resilience of the U.S. economy, which is expected to soften in the second half of the year. However, the strong jobs report earlier this month tempered hopes for aggressive rate cuts. With limited time left in Chair Powell’s term, markets have largely dismissed the possibility of a rapid or outsized easing cycle. Still, the cost of waiting remains low, encouraging cautious positioning.
Trump has reiterated his call for aggressive monetary easing, suggesting rates should be cut by as much as 300 basis points. Meanwhile, reports in the financial press point to Hassett and Bessent as the leading candidates to replace Powell. The June FOMC minutes were mainly uneventful, although a few members indicated they might support a rate cut by July if the data evolves as expected, highlighting emerging divisions within the committee.
Curve steepener trades are gaining traction again, though investors are becoming more selective. The 2Y/5Y slope has not kept pace with the steepening of the 2Y/10 slope. Both steepeners have a negative carry; however, the 2Y/5Y is much more economical at the moment, with a -19 bps yield pick-up compared with -35 bps for the 2Y/10Y. Steepener trade is a good bet; however, the 2Y/5Y offers better value than the 2Y/10Y.
Many investors have now adjusted to the higher-rate environment and are not alarmed by the 10-year yield trading in the 4% to 5% range. They point to historical precedent, when Treasuries regularly traded at these levels without disrupting the broader economy. However, they do caution that volatility may be significantly higher than in the post-GFC era. Fixed-income investors are now pricing risk more aggressively, recognising that the secular bond bull market following the GFC was primarily driven by abundant central bank liquidity and those conditions are unlikely to return.
Still, in the short term, volatility has eased. The MOVE index, a gauge of Treasury market volatility, has declined to a three-month low, reflecting a calmer tone in recent trading. The market is pricing in the favourable mix of growth, inflation, and policy.
Credit
The pace of corporate bankruptcies has been steadily rising as more companies begin to feel the burden of higher interest costs. In June, bankruptcies reached their highest monthly level since 2010, though the overall rate remains relatively low by historical standards.
Higher inflation-related costs are squeezing businesses, forcing them to either absorb the costs through narrower profit margins, pass them on to consumers, or, more likely, do both. This dynamic puts pressure on margins while keeping inflation elevated.
Amid elevated market volatility and economic uncertainty, credit has started to offer slightly more attractive pricing. However, most investors are buying corporate bonds for income and carry rather than expecting meaningful spread compression, as spreads remain tight and well within historical ranges.
Despite tighter financial conditions and substantial supply in recent months, investor demand for credit remains robust. Cash levels, dealer inventories, and portfolio beta exposure are all within normal historical bounds. Still, positioning reflects caution, with many investors operating under a macro view that leans toward stagflation.
U.S. corporates are facing a meaningful maturity wall, with a significant portion of debt coming due over the next few years. This will force many companies to refinance in a backdrop of heightened volatility and elevated rates. Combined with increased Treasury issuance, this could set the stage for more attractive entry points for credit investors.
The 12-month trailing default rate is currently around 2.3%, but when including distressed exchanges, that figure rises to over 4.5%. This does not yet account for rising “Pay-In-Kind” (PIK) activity, a red flag often associated with companies under financial stress.
Equities
Stocks hit record highs on Wednesday as investor concerns over Trump’s tariff actions began to ease. Gains were led by Nvidia (+3.5%), which made history by becoming the first company to reach a $4 trillion market capitalisation. U.S. equities posted modest gains for the week, with the Dow up 1.02% and small caps gaining 0.63%, while the S&P 500 and Nasdaq ended slightly higher.
Energy was the top-performing sector in the S&P 500, rising 2.47%, while financials and consumer staples lagged, falling 1.92% and 1.79%, respectively. Communication services also declined, down 1.17%, while other sectors saw more modest moves. Despite lingering concerns over tariffs, the market has remained resilient, with the S&P 500 now up nearly 30% since its low point in April.
Volatility in equities has dropped sharply, with the VIX hovering near 16—well below its long-term average. U.S. bond market volatility has also fallen to a three-year low. This calm partly reflects investor confidence in the so-called “TACO” trade (“Trump Always Chickens Out”) – the belief that Trump will ultimately retreat from aggressive tariff measures. However, given past reversals and shifting political incentives, this complacency could be tested. The market’s relaxed posture appears at odds with the sharpest rise in tariffs in decades, suggesting a disconnect between escalating trade tensions and perceived risk.
There will likely be a point of exhaustion. Many companies are still selling through older, lower-cost inventory, but this is expected to run out in Q3—posing potential headwinds to profit margins.
This week was also marked by earnings surprises and significant M&A activity. CoreWeave (CRWV) plunged 23.8% after announcing a $9B all-stock acquisition of Core Scientific (CORZ -30.5%). MP Materials (MP) soared 41.7% on news of a rare earth magnet partnership with the U.S. Department of Defense. Kellanova (KLG) jumped 30.6% on a $3.1B cash buyout by Ferrero. Autodesk (ADSK) fell 11.5% amid reports it may acquire PTC (+9.9%).
Other notable movers included Apple (AAPL -1.1%) after COO Jeff Williams announced his retirement, and Hershey (HSY -6.6%), which named a new CEO from Wendy’s (WEN -5.6%). Delta (DAL +11.4%) and Levi’s (LEVI +14.8%) posted strong results, while Helen of Troy (HELE -30.6%) and Conagra (CAG -7.6%) disappointed. Solar stocks weakened following Trump’s call for stricter clean energy regulations, while UnitedHealth (UNH -1.4%) came under DOJ scrutiny for Medicare billing practices.
On the macro front, conditions remained stable as investors looked ahead to next week’s June CPI release and the start of Q2 earnings season. Economic uncertainty is expected to be a central theme in upcoming earnings calls. While the reconciliation bill provided clarity on tax cuts and the debt ceiling, global trade tensions continue to weigh on sentiment. Still, despite increasingly hawkish rhetoric, markets appear to be leaning toward a scenario of de-escalation—particularly after the recent extension of key tariff deadlines.