Last week saw U.S. equities push to new highs with the S&P 500 breaking through the 6,300 mark, even as tariff concerns loomed large with the August 1st deadline approaching. There is a bit of a continuing  disconnect between equity optimism and underlying economic anxieties, with the dollar strengthening for most of the week before pulling back.

Tariff Tensions Building

The dominant narrative throughout the week centred on President Trump's tariff threats. Despite Commerce Secretary Howard Lutnick suggesting a potential trade deal with the EU, the President is looking for a 15% to 20% minimum against the EU, according to people briefed on the talks that are going on, even if a deal is reached. This stance has left European negotiators frustrated, as they had been working toward reducing tariffs back to 10% rather than the threatened 30%.

The headline inflation number for the U.S. wasn't too bad. But when you look at what's up and what's down, you start to see that perhaps tariffs are starting to have an impact. The June CPI data showed early signs of tariff pass-through, particularly in goods prices, though the headline number came in slightly below expectations at 2.7% year-over-year.

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Fed Independence Under Scrutiny

Market volatility early in the week stemmed from reports that President Trump was considering firing Fed Chair Jerome Powell. While Trump later walked back these suggestions, stating it was "highly unlikely" unless Powell "has to leave because of fraud," the episode highlighted ongoing tensions between the administration and the Federal Reserve. The Wall Street Journal reported that Scott Besant seems to have convinced the President that it would have too many legal consequences but also made too many impacts on the economy.

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 Diverging Economic Fortunes

The week revealed a stark contrast between U.S. economic resilience and softening conditions elsewhere:

United States: Data out of the U.S. has been fairly strong. The Philly Fed manufacturing index was better than expected. In July, the same deal with retail sales, initial jobless claims came down as well. This strength justified the equity market's enthusiasm, though questions remain about sustainability.

Australia: The unemployment rate unexpectedly jumped to 4.3%, the highest since November 2021. The full employment change is down 38.2 thousand jobs, suggesting the RBA may have more room to ease policy than previously thought.

United Kingdom: Similar weakness appeared in UK data, with unemployment rising to 4.7%, though wage growth continued to moderate, supporting the case for potential Bank of England rate cuts.

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Central Bank Positioning

Central banks are facing increasingly complex policy decisions. In the U.S., the Fed is now expected to hold rates steady at its July meeting, with markets pricing in only 44 basis points of cuts for the year—despite political pressure, including Donald Trump’s call for a dramatic 3% rate cut. In Europe, the ECB is also expected to leave rates unchanged at its upcoming meeting. Meanwhile, the RBA is under growing pressure to ease policy in response to weaker employment data.

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Market Performance

Equities: The S&P 500 hit new all-time highs above 6,300, with the Nasdaq also performing well. However, good may not be good enough as evidenced by Netflix falling 4.5% despite beating revenue guidance.

Currencies: The U.S. dollar strengthened through most of the week on the DXY index before pulling back. The Australian dollar weakened below 65 cents, while the Yen showed some strength following Japan's political uncertainty.

Bonds: Treasury yields remained relatively stable, finishing the week around 4.42% for the 10-year, with modest movements across global bond markets.

Commodities: Oil prices remained subdued, with Brent hovering around $69 per barrel, while gold continued its strong year-to-date performance, up 27%.

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Looking Ahead

As we approach the August 1st tariff deadline, markets appear surprisingly complacent about the potential economic disruption. We’re also seeing an environment where import volumes are falling, and smaller ports are feeling it the most. Container traffic dropped 7.9% in June, after a 6.6% decline in May, pointing to weaker trade activity.

The disconnect between equity market optimism and mounting economic headwinds suggests either markets are correctly anticipating last-minute trade deals or are in for a rude awakening come August which could coincide with heavier treasury issuance which will probably drain liquidity from the market. The main things to watch over the next week will be  major tech earnings and some major central bank decisions.

The key question remains: Will President Trump follow through on his tariff threats, or will pragmatism prevail? The answer may well determine market direction for the remainder of the summer along with potential indigestion in bond markets.