The Recent Context: A Shifting Landscape
The past week closed amidst a confluence of major market drivers: tariff regime shifts, evolving central bank narratives, and key economic data releases alongside ongoing advancements in AI. Amidst this dynamic backdrop, US stocks notably extended their rally, with the Nasdaq reaching a fresh record high, the dollar experienced some weakening, and bond yields remained relatively stable.
Trade: The New Tariff Frontier
The new US global tariff regime officially commenced. While some outstanding issues and framework details still require clarity, the effective average tariff rate is projected to rise from under 3% at the end of 2024 to 17-20% range. Interestingly, and despite the immediate increase in US tariff revenues, this has thus far occurred without triggering widespread, major retaliation, though responses from key trading partners like Brazil, China and India may still materialize.
Meanwhile, the US escalated its tariff stance by threatening secondary sanctions on India over its continued imports of Russian oil. This development takes on added significance as it precedes President Trump’s meeting in Alaska next week with Russian President Putin. Beyond the central focus on discussing a ceasefire in the Russia-Ukraine war, this summit could influence the likelihood of these secondary sanction threats extending to other nations engaged in the oil trade with Russia.
It remains premature for economists to confidently assess the full domestic and international macroeconomic implications of America’s new tariff regime. To date, many companies appear to have utilized existing inventories, absorbed costs through profit margins, and exerted pressure on foreign suppliers as temporary buffers, awaiting a clearer picture of the tariff regime (content and durability). Foreign suppliers seem to have adopted a similar wait-and-see approach. However, both domestic firms and their international counterparts now face more challenging, longer-term strategic decisions regarding pricing, supply chain adjustments, and market focus.
Given the inherent differences in tariff sensitivity, pricing power, demand elasticities, and cash reserves, outcomes are highly likely to vary significantly across sectors and individual companies. Correspondingly, the reactions of trading partners will also differ, creating a complex, multi-layered environment. From an analytical perspective, it remains helpful to view this process through the lens of multi-stage game theory, accompanied by unstable aggregation characteristics. In this framework, it will undoubtedly take considerable time for the global tariff regime to settle into a new, albeit potentially still unstable, equilibrium. Furthermore, economists will require more data and observation to confidently quantify the precise impacts on global growth and inflation.
Central Banks: A Shifting Fed after More International Divergence in Rates
The Federal Reserve saw a key development last week as President Trump opted for a “temp solution” to fill the vacant Board seat left by Governor Kuegler, nominating Dr. Stephen Mirren to serve the remaining term until January. This nomination comes amidst reports that the list of potential candidates to replace Chair Powell has expanded to ten, indicating a further period o leadership uncertainty for the central bank.
Dr. Mirren is poised to introduce fresh perspectives to a traditionally Chair-centric Fed policy committee. This committee, until last month’s notable public dissent by two Board Governors, has been criticized for an elevated degree of groupthink, often seen as overly reliant on a “data-dependency” approach. Indeed, if Congress approves Dr. Mirren’s nomination by the September FOMC meeting – a significant “if” given the Senate’s schedule – it is not out of the question that the now-highly anticipated (following the last monthly Jobs Report) 25 basis point rate cut could see three dissenters calling for a more aggressive 50 basis point reduction.
Recent remarks by Fed officials suggest a greater openness to a rate cut as early as next month than was evident just a week prior. This shift, of course, reflects the impact of the substantial revisions in the last Jobs Report. It underscores, once again, the extent to which an overly backward-looking data-dependent approach not only sidelines crucial strategic assessments but also consistently risks a lack of timeliness in policy responses.
In contrast, the Bank of England’s Monetary Policy Committee, with its inherently greater transparency and the inclusion of external members, once again provided a timely contrast to the Fed’s traditional lack of diverse perspectives. Based on a narrow 5-4 vote, the Bank reduced rates by 25 basis points for the fifth time this year, bringing them to a level below the Fed’s, even as UK inflation is now projected to increase to 4% this year. The razor-thin 5-4 majority followed a first round of 4-4-1 voting, indicating significant internal debate with one member advocating for a 50 basis point cut, and the remainder evenly split between a 25 basis point reduction and no change. This divergence highlights, yet again, the dispersion in the approaches to managing inflation and growth dynamics across major economies.
Economic Data: Stagflationary Winds and Regional Resilience
On the data front, two key US releases rekindled discussions of possible stagflationary pressures impacting the economy, with global spillover potential. The Services PMI showed a fall in its employment sub-component coupled with yet another increase in prices paid. Concurrently, the consistent, steady rise in continuing jobless claims further amplified these concerns.
Across the Atlantic, economic activity numbers generally surpassed expectations at both the regional and country levels, particularly in Germany, the Eurozone’s largest economy. This offers a glimmer of resilience against broader regional and global headwinds.
Artificial Intelligence (AI): Diffusion as the Next Frontier
The week’s news on AI continued to indicate an innovation that is rapidly accelerating, getting smarter, and becoming even more “general purpose.” However, the material impact of AI on economy-wide productivity remains contingent on another crucial factor: diffusion. This refers to the extent to which broad sectors of the economy can adopt, and integrate in as even a fashion as possible, these transformative innovations that hold the potential for sustainably increasing growth. Without widespread and effective integration, AI’s full macroeconomic benefits will be delayed.
The Week Ahead: An Interesting Juncture for Global Indicators
This coming week is poised to be dominated once again by the critical trifecta of tariffs, incoming economic data, and further central bank commentary. Moreover, a heavy slate of economic data from the three most systemically important economic regions (China, Eurozone, and the US) will offer insights into the robustness of global growth amidst the evolving structural economic landscape.
The week sees the release of US inflation data, which will, needless to say, be dissected for any signs of price pass-through from the new tariff regime. Consensus forecasts anticipate annual headline CPI inflation to edge up to 2.8% and core CPI to 3.0%. PPI inflation will follow a day later, with consensus expectations again signaling indications of somewhat hotter price pressures.
Also, with renewed attention on stagflationary winds, there will be considerable interest in several key US releases: activity data (including retail sales, industrial output, and the Empire manufacturing survey) and sentiment indicators (UMich Consumer Sentiment and NFIB Small Business Optimism). This flurry of data is likely to inform the “Fedspeak” scheduled for this week, as central bankers offer their interpretations and policy cues.
The US also releases its Federal budget balance for July, which is expected to show a negative swing of approximately $175 billion, highlighting ongoing fiscal considerations that are leading to sizeable regular issuance of Treasury bonds and bills.
Across the pond, keep a close watch on UK activity data, including quarterly GDP, jobs figures, and industrial output. This comes on the heels of reports indicating that the Chancellor faces the significant challenge of already needing to raise substantial resources at the October budget without undermining the country’s already tepid growth dynamics amid significant pressure on the provision of public services.
The Eurozone also has a relatively heavy schedule, with lots of CPI and PPI inflation data on tap, along with the closely-watched ZEW economic expectations survey for Germany, and industrial production and employment figures for both individual countries and the area as a whole. These will be useful for assessing the region’s economic momentum.
Finally, it is a relatively heavy week for China, where we will receive key indicators including industrial output, retail sales, and foreign direct investment. These releases will provide clues on the health of the world’s second-largest economy, including its ongoing attempt to balance short-term stimulus and longer-term reforms.
