Markets in a Minute: Markets Rally on Trade Deals – But Economic Clouds Loom
In July, global investor sentiment benefited from less political noise and more clarity regarding future US trade and fiscal policy. The US reached several trade agreements, including a deal with Vietnam, leaving US tariffs at 20% (40% on ‘trans-shipments’ from third countries passing through Vietnam). Deals with Japan and the European Union (EU) followed at the end of the month, with most EU imports receiving a 15% tariff rate, including automobiles. Although these rates are much higher than previously anticipated, equity markets responded positively as the risk of an escalating trade war reduced. In terms of US fiscal policy, President Donald Trump managed to pass the ‘One Big Beautiful Bill Act’ – which was even more expansionary than the initial version. Members of the US Federal Reserve (Fed) remain in a difficult position, as the timeline for clarity on the economic effects may be pushed back to the autumn.
Financial tariffs still dominating headlines, as underlying weakness appears in the US economy
- Financial tariffs and trade deals were again a key driver of sentiment for investors, which deteriorated toward the end of the month after Trump signed an Executive Order to raise tariffs on most US trading partners, effective 7th August. However, the US announced trade deals with the EU and South Korea, and gave Mexico an extension to allow for further talks.
- The Fed maintained interest rates at a target range of 4.25% to 4.50% at its July monetary policy meeting. Two Fed governors voted to lower rates by 0.25%. Fed Chair Jerome Powell noted that inflation remained above the Fed’s target and reiterated that data would determine monetary policy decisions.
- The US economy added 73k jobs in July, according to the Labor Department, significantly below estimates of an approximate 115k gain. Readings for May and June were also revised down by 258k, bringing the three-month total to just 106k jobs. The revisions suggest the US labour market has cooled by much more than previously thought and that the US economy is weakening.
- US inflation – measured by the core Personal Consumption Expenditures index (the Fed’s preferred measure of inflation) – increased 0.3% month over month in June, up from May’s 0.2% reading. On a year-on-year view, consumer prices increased 2.8%, well ahead of the Fed’s 2% long-term inflation target.
Inflation returns to the Japanese economy, but US trade deal improves sentiment
- The Bank of Japan (BoJ) held interest rates at 0.50% at its 30-31st July monetary policy meeting. Its quarterly outlook revised inflation expectations, with the core consumer price index (CPI) likely to reach 2.7% in fiscal 2025, up from the 2.2% forecast in April, reflecting consistent increases in food prices. BoJ Governor Kazuo Ueda said the likelihood of the BoJ’s outlook being realised had increased, raising investor expectations of rate hikes before year-end.
- Japan reached a trade agreement with the US and agreed to invest $550bn (£407bn) in the US, while its goods sold to America would be taxed at 15% when they reach the country, below the 25% tariff threatened by Trump. Trump said on social media that Japan would open its economy to US goods, including cars, trucks, rice and certain agricultural products.
- Japan’s industrial production increased 1.7% month over month in June, beating market expectations of a 0.6% decline and following May’s 0.1% decline. Retail sales rose 2.0% year-on-year in June, ahead of an expected 1.8% increase and following a 1.9% rise in May.
China’s Politburo reaffirm its supportive economic stance, but data remains mixed
- July’s Politburo (the policymaking committee of the Chinese Communist Party) echoed the tone of the previous meeting, again highlighting the need to bolster domestic consumption, stabilise tariff-exposed sectors and employment, and crack down on inefficient, anti-competitive industrial behaviour.
- China’s producer price index fell 3.6% in June from a year earlier, according to its statistics bureau. The decline was worse than economist forecasts and marked the 33rd month of factory deflation, as well as the biggest drop for producer prices in nearly two years, according to Bloomberg.
- Chinese CPI inflation unexpectedly increased 0.1%, shaking off a four-month streak of declines. However, analysts said the increase was likely driven by recent stimulus measures rather than a sustained improvement in consumer confidence.
Market movers
Global equity markets continued to rise in July, with Emerging Markets topping the performance tables – spearheaded by China and Korea. Investors particularly appreciated the continued robustness of the Chinese economy, despite ongoing trade tensions with the US. Rising iron ore and steel prices also helped. Taiwanese equities continued to benefit from the artificial intelligence (AI) spending frenzy. The US earnings season also boosted returns, with approximately 80% of the 500 largest companies that reported beating earnings and revenue growth expectations.
The fixed income market was influenced by several factors, including trade policies, inflation, and the uncertain economic outlook. While some sectors have emerged as clear winners, such as high-quality corporate bonds, the outlook has weighed on government bond returns. Hot inflation readings, concerns over public debt levels and a reassessment of interest rate cut expectations all caused yields to climb higher, subsequently depressing bond prices.
In conclusion
Investors appear to be pricing in a ‘goldilocks’ scenario where inflation remains subdued and economic growth surges at the hands of fiscal stimulus and an AI-induced productivity boom. Our investment partners maintain the view that a well-diversified portfolio can protect against the risk of resurging inflation and an economic recession, while benefiting from the current positive investor sentiment.
If you would like to discuss your investments or recent developments, please contact us.