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The past week witnessed significant developments in global trade negotiations, monetary policy expectations, and fiscal policy debates, with the U.S. dollar hitting multi-year lows as markets digested a complex mix of signals.

Trade Wars Take Centre Stage

The week's most dramatic development came from the U.S.-Canada trade relationship. After President Trump abruptly ended negotiations on Friday due to Canada's digital services tax, Canada capitulated early in the week, rescinding the tax to resume talks. This swift reversal raises critical questions for Europe and other nations maintaining similar digital taxes. The message appears clear: countries may need to choose between protecting their digital tax revenues and securing favourable trade terms with the United States.

Meanwhile, the U.S.-China trade relationship showed signs of stabilisation, with agreements on rare earth shipments, though Beijing maintained export licensing requirements. The administration expressed confidence about potential deals with India and indicated that baseline 10% tariffs might be acceptable to the EU, though negotiations continue around sector-specific exemptions.

Central Banks Signal Dovishness

At the ECB's Sintra forum, Federal Reserve Chair Jerome Powell made perhaps the week's most significant monetary policy statement, acknowledging the Fed "would have already cut rates" if not for tariff uncertainty. This explicit acknowledgment validated market expectations while highlighting how trade policy continues to complicate monetary decisions. Powell notably didn't rule out a July cut, keeping markets on edge ahead of Friday's payroll data.

In line with the easing vibe amongst central bankers the Bank of England's (BOE) Andrew Bailey confirmed the next move would be downward, citing economic softening and labour market weakness. Markets now price three BOE cuts starting next month. The divergence in global monetary policy continues to pressure currency markets, with the U.S. dollar index falling below 97 for the first time since early 2022. European inflation also held steady at 2%, with core measures at 2.3%, while Japan's Tokyo CPI has softened more than expected. Lastly, and as discussed last week, in Australia, May CPI came in at 2.1% year-over-year, significantly below expectations and prompting markets to price in RBA rate cuts. 

Fiscal Drama in Washington

The "One Big Beautiful Bill" inched closer to passage, clearing the Senate in a dramatic 50-50 vote broken by Vice President JD Vance. The legislation, combining $4.5 trillion in tax cuts with $1.2 trillion in spending cuts, faces a tight deadline as Trump pushes for July 4th passage. Treasury Secretary Scott Bessent attempted to calm fiscal concerns, suggesting no need to extend debt maturities at current yields and dismissing tariff-related inflation as "transitory."

Mixed Economic Signals

Economic data painted a nuanced picture. U.S. JOLTS data showed surprising resilience with job openings at 7.8 million, the highest since November. However, the ISM manufacturing index remained below 50, suggesting continued contraction, while input costs surged. This combination reinforces stagflationary concerns, though robust employment data provides a counterargument to this. 

European inflation remained relatively contained at 2% headline, while China's PMIs showed modest improvement, with the Caixin manufacturing index crossing back above 50. Japanese data was surprisingly positive, with the Tankan survey beating expectations despite trade concerns.

Market Implications

The week's developments suggest markets are navigating a transition period where trade policy uncertainty, fiscal expansion concerns, and monetary policy expectations create unusual cross-currents. The dollar's weakness reflects both fiscal concerns and expectations of eventual Fed easing, while resilient equity markets appear to be looking through near-term uncertainty toward potential rate cuts and fiscal stimulus. 

In the very near term macro parameters like trade, U.S. fiscal policy and jobs data will likely drive markets while the next U.S. earnings season will kick off in mid-July. This could be the first proper read we get on how corporations have been navigating the chaos around trade negotiations seen in the last quarter but, as we discuss in this week’s video with Andrew Hunt, bond markets could be back in the news by late July early August as markets digest what the ambitious Treasury issuance schedule needed to fund the widening U.S. deficit implied by the Big, Beautiful Bill.