The Context
We are coming from a week that left us with uncertainty in two US policy areas with global spillovers: tariffs and Federal Reserve policy independence.
Ahead of the August 1st tariff deadline, the US continued its push for new trade deals, with progress reported in discussions with partners like Japan. Meanwhile, President Trump acknowledged the difficulty in simultaneously negotiating with so many countries and the possibility of a potential generalized 20-50% tariff band. While offering some clarity, such a move would result in a substantial escalation in the global tariff regime. The stability of such a widespread framework and the potential for retaliatory measures from other nations remain pressing questions for many countries.
The situation surrounding the Federal Reserve is even more intricate, underscored by differing interpretations of President Trump’s visit last Thursday to the Fed’s building renovation. Some viewed it as a “truce,” citing the President’s pledge not to fire Chair Powell and his expectation that the Chair would “do the right thing” by cutting interest rates. Others, however, saw the visit as an escalation, aligning with Steve Bannon’s “flood the zone” strategy. They point to the awkward televised exchange between the President and Chair Powell regarding the renovation’s cost as evidence of continued and clear friction.
Across the Atlantic, the European Central Bank (ECB), as anticipated, held interest rates steady. The surprise came from President Lagarde’s signal that this pause in rate cuts could extend beyond the next Governing Council meeting, suggesting a more cautious approach than some had expected.
Data highlights from last week revealed a return to several familiar dispersions in the U.S. that were prominent last year but had moderated recently:
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U.S. outperformance relative to Europe, particularly evident in corporate earnings.
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A significant divergence between U.S. services activity (hitting a seven-month high) and manufacturing activity (reaching a seven-month low), according to S&P PMI data.
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The widening gap between lower-income and richer households, again highlighted by corporate earnings reports.
Europe also experienced a services/manufacturing dispersion, though its services sector was less dynamic overall. Interestingly, consumer confidence in Europe saw a larger-than-consensus uptick amidst ongoing trade negotiations with the U.S. (and between China and the US).
The Week Ahead
This week promises to be an exceptionally busy one, packed with notable policy decisions, major economic data releases, and systemically important corporate earnings – all set against the backdrop of seasonally thinner market liquidity.
Wednesday’s Federal Reserve interest rate decision is widely expected to keep rates unchanged. However, the real focus will be on the precise wording of the accompanying statement and Chair Powell’s press conference. This will be a tightrope walk for Powell: if he shifts significantly dovish without compelling new data, he risks appearing to buckle under political pressure. Yet, if he maintains his previous forward guidance, he risks reigniting tensions with the President. The market will be watching for any subtle shifts in tone or language that could signal future policy direction.
Friday delivers a double dose of market-moving news. We’ll receive the monthly jobs report, the most comprehensive snapshot of the U.S. labor market. With both the demand and supply sides of this crucial market expected to become more fluid, attention will be on monthly job creation (against the backdrop of a wide range of forecasts), alongside hourly earnings and labor force participation.
The extended deadline on tariffs also falls on Friday. Ahead of that, a flurry of diplomatic activity is expected in Scotland over this weekend. European Commission President Ursula von der Leyen is scheduled to meet President Trump, aiming to finalize a trade deal with the US, which President Trump assigned a 50-50 probability. British Prime Minister Keir Starmer will also meet with President Trump, seeking to avoid any upward adjustment to the favorable low tariff rates he previously negotiated compared to other nations.
Beyond these headlines, the U.S. will see a heavy slate of economic data releases. Keep a close eye on PCE inflation (the Fed’s preferred measure), JOLTS, GDP, consumer spending and confidence, and PMI figures, all of which will offer further insights into the health of the U.S. economy.
Quarterly earnings from tech giants Amazon, Apple, and Microsoft are also on the docket. These releases often provide valuable insights that extend beyond their individual sectors, offering broader clues about consumer behavior, technology trends, and overall economic sentiment.
In Europe, watch for GDP estimates for the region and several individual countries, alongside CPI inflation for the Eurozone and key nations like France, Germany, Italy, and Spain.
Finally, in Asia, the Bank of Japan is expected to keep rates unchanged, with the primary focus remaining on the behavior of the long end of the yield curve.
