Markets have been surprisingly resilient amidst escalating tariffs and trade tensions. Despite President Trump imposing a 50% tariff on copper imports and threatening a 200% tariff on pharmaceuticals, as well as the unexpected 50% tariff on all imports from Brazil for political reasons, most equity markets were more or less flat for the week. Cyclical small caps sold off more aggressively at the end of the week to end down almost 2% for the week. 

Analysts are perplexed by the market's lack of reaction, speculating that investors are either bored of tariff news, don't believe the threatened tariffs will be implemented, or expect the economic impact to be limited. Some evidence suggests companies are absorbing tariff costs by cutting margins rather than raising consumer prices. Japanese automakers cut export prices by 19% in response to US tariffs.

However, analysts warn the muted inflation impact may be temporary, with costs likely passed on to consumers in the coming months as inventories get depleted. The Fed remains divided on the inflation outlook, with some officials arguing rates are close to neutral while others see upside inflation risks from tariffs.

A solid 10-year Treasury auction helped ease concerns around weakening foreign demand for US debt but global bond yields still drifted upwards and then a little more suddenly overnight after the latest CPI print. This showed some surprising components and sparked fears among traders that inflation could remain higher for longer. This has led to reduced expectations of imminent interest rate cuts by the US Federal Reserve, prompting a sell-off in Treasuries, pushing yields up.

Other economic news pointed to a weaker global economy:

- The RBNZ left rates unchanged but reinstated an easing bias, forecasting further cuts ahead

- Chinese PPI deflation deepened to -3.6% y/y, highlighting disinflationary pressures

- U.S. initial jobless claims fell but continuing claims hit a new high, a potential red flag for hiring

- Italian industrial output slid 0.7% in May, an early sign of payback from front-loaded pre-tariff activity

Overall, while markets have taken an unexpectedly sanguine view on proliferating tariffs for now, there were some overtones of the dreaded stagflation later in the week. Over the next few weeks the U.S. reporting season, which is just starting, will provide some more clues on the impacts of tariffs on the U.S. and global economy. At present U.S. corporates are expected to deliver modest earnings growth overall, with sharp sector divergences and heightened focus on corporate guidance and the impacts of U.S. trade policy. Most analysts project a rebound in the second half of the year, but estimate cuts and macro risks are tempering near-term optimism.