Markets had a quiet week. Global equities were unchanged in local currency terms and up 0.7% in sterling terms as the pound unwound some of its recent gains against the dollar, retreating to $1.35. The only notable event was Nvidia’s market capitalisation breaking through the $4tn mark, the first for a company. Bonds, meanwhile, saw yields drift a little higher.
Either the summer torpor has already set in – justified here at least by the latest heatwave – or the so-called TACO trade (Trump Always Chickens Out) is alive and kicking as far as tariffs are concerned, if not attacks on nuclear facilities. Last week saw a veritable blizzard of tariff announcements from the White House.
Tariffs were threatened to be hiked for a host of countries from 1 August – to name just a few, tariffs of 25% were announced for Japan and Korea, 30% for the EU and Mexico and 50% for Brazil. The new tariffs were not confined just to countries. Copper will be subject to a 50% tariff and pharmaceuticals a tariff possibly as high as 200%, albeit not for another year or two.
The key here is that these tariffs hikes are just threats at the moment and the market’s hope appears to be that once again Trump will back down and the final tariffs will be negotiated down significantly over the next couple of weeks.
This is quite possible but far from guaranteed. Trump is riding high on the back of his recent domestic policy successes – most notably the enactment of his big, beautiful budget bill and a ruling in the Supreme Court. Markets are also becalmed with US equities recently breaking through their February high and Treasury yields well below their peak at the start of the year.
Both factors may embolden Trump to stick to his guns – tariffs after all are one of his core beliefs. With US equity valuations back close to their excessively high level of late last year, there is definitely room for some renewed volatility over the summer. That said, ‘buy-the-dip’ retail investors (much more than institutions) have driven the recent market rebound, will be buoyed by their successes of late and would very likely step in once again, limiting any downside correction.
Last week also saw the US Administration widen its attack on Fed Chair Powell. In addition to calls for the ‘numbskull’ to cut rates to as low as 1% from their current 4.25-4.5%, Trump called for his immediate resignation if claims of cost overruns for the refurbishment of the Fed headquarters prove true.
Markets, however, were unfazed by this latest escalation and most likely Powell will still serve out his term which ends in May. Rather than worrying about the growing threat to the Fed’s independence, markets are just focusing on the positive aspect, namely that Powell’s successor will be considerably more willing to lower rates.
The only macro data released of any note related to UK GDP and made disappointing reading. Activity fell a slight 0.1% in May, rather than rising slightly as had been expected. This was the second consecutive decline but follows an unexpectedly strong performance in the first quarter. The underlying trend remains one of sluggish growth.
Still, these numbers, along with news today of a further weakening in the labour market, mean another 0.25% rate cut in early August looks all but certain. Indeed, BOE Governor Bailey on Sunday talked of speeding up rate cuts if the labour market were to deteriorate faster than anticipated.
On the fiscal front, the Office for Budget Responsibility (OBR) added to the current gloom over the state of the public finances. However, rather than focusing on the shortfall of £20bn or so, which the Chancellor now looks likely to plug through tax increases in the Autumn, it highlighted the ‘daunting’ longer term risks.
Public debt is projected to rise to a massive 270% of GDP from just under 100% at the moment. But this is over the next fifty years, too long a time horizon for most of us and apparently the markets to contemplate, and gilts largely shrugged off the OBR’s gloom and doom.
This coming week is a busy one. Tuesday will see the big banks kick off the US earnings season, a slug of Chinese data and the June US inflation numbers. Here in the UK, we have the Chancellor’s Mansion House Speech on Tuesday, inflation data on Wednesday and labour market numbers on Thursday.
Rupert Thompson – Chief Economist