US tariffs back in the spotlight

Key takeaways

US tariff news dominated the headlines, with plenty of dates and numbers being announced by the White House, however, market reaction was muted compared with previous tariff announcements. Meanwhile, in the UK, the economy shrank for the second consecutive month.

Looks like 1 August may be the new 9 July for tariffs
Financial markets appeared untroubled by the talk from President Trump of various tariff levels set to be imposed on various countries, with the deadline for negotiations to avoid/reduce ‘reciprocal tariffs’ being pushed back by three weeks to 1 August. Investors are taking encouragement from policymakers indicating that they want a successful outcome from the trade talks. Indeed, the US administration will likely be incentivised to progress the trade talks, especially if the legal foundations for tariffs look unsteady. Tariff uncertainty is becoming increasingly normalised, rather than regarded as a major new headwind, based on the view that despite all the bluster, the President’s bark will remain worse than his bite. Specifically, markets are looking through Trump’s classic negotiating tactics of raising the pressure into the final stages.

Expect less restrictive policy in the US in the coming months
So far, US economic activity data is proving remarkably resilient given the introduction of tariffs; while in aggregate, the US growth picture is not as strong as it was in late 2024, it is nowhere near as bad as feared in early April 2025. Central bank policy is still restrictive, but is expected to become less so over the next 12 months, with markets pricing in two interest rate cuts during the second half of this year. The pace of rate cuts is expected to pick up early in 2026, as the inflationary effect of the tariffs will have worked through by the end of 2025. Additionally, the chair of the central bank’s term in office will end in May 2026 and his successor is expected to be more sympathetic to the administration’s views on more rapid interest rate cuts.

UK growth stutters
On a seasonally-adjusted basis, UK gross domestic product (GDP) – the main measure of growth of the economy - shrank unexpectedly by 0.1% in May, after contracting 0.3% in April. Declining production and construction output drove this weakness, with services struggling to offset the declines. Elsewhere, Andrew Bailey, the Bank of England governor, said that the weakening jobs market could prompt further cuts in interest rates, which currently stand at 4.25%. Interest rates will be reviewed at the Bank’s next policy meeting on 7 August.

Market moves

• Most stock markets finished the week in positive territory, unruffled by the focus on US tariffs.

• However, there were some renewed jitters in global bond markets around fiscal sustainability. Bond yields rose in pretty much every major economy, led by Japan, which saw a big spike in longer-dated bond yields, pushing the 30-year yield back above 3%. (Bond yields and bond prices move in opposite directions.)

What to look out for this week

• The latest US consumer price data is published on Tuesday, followed by producer price data and industrial production data on Wednesday. Retail sales data follows on Thursday along with the preliminary July University of Michigan survey on Friday. Consumer price data will also be published in the UK on Wednesday and Japan on Friday.

• The second quarter earnings season kicks off this week with US banks reporting Q2 results.

• A meeting of G20 finance ministers and central bank governors is scheduled on Thursday and Friday.

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