Market Monitor | July Update
Headlines and Highlights
- New tariffs taking effect: After months of negotiations and delay, President Donald Trump signed an order finalizing tariffs on merchandise from about 70 U.S. trading partners – a new trade regime set to be launched this Friday. A separate order raising the rate on products made in Canada to a punitive 35% took effect August 1st. The moves raise the U.S. average effective tariff rate to 18.3%, up from 2.5% at the beginning of the year and the highest since 1934, according to the nonpartisan Budget Lab at Yale. Aside from China, there was little initial resistance as countries cut deals or decided not to retaliate in order to avoid the risk of harsher rates.
- Jobs report raises concern, prompts firing: The economy added a fewer-than-expected 73,000 jobs last month, a meaningful sign of slowing growth even as unemployment remained low in ticking up to 4.2%. Job gains from May and June also were revised down significantly, raising questions about whether hiring has been holding up as well as had been thought. President Trump took the controversial step of firing the head of the Bureau of Labor Statistics that compiles the data, Erika McEntarfer, assailing her as an appointee of President Joe Biden and calling into question the fairness and accuracy of the latest report. No factual evidence has yet surfaced to support his claim.
- Fed holds rates level amid dissent: The Federal Reserve kept the short-term interest rate unchanged in the 4.25%-4.5% range despite outspoken pressure from President Trump and dissenting votes from two Fed governors for the first time since 1993. Fed Chair Jerome Powell, who is concerned that tariffs could reignite inflation, said there is “a long way to go” to understand their impact on the economy. Trump called on the Fed’s board of governors to assume control, usurping Powell’s power in order to lower rates substantially.
Select Market Returns
Our Views
- The global and U.S. economies have so far held up better in the trade war than most expected. Tough new tariffs and a weakening labor market add to economic uncertainty and concerns about slowing growth. However, corporate earnings and revenues have been strong this quarter and we believe the economy will get a boost from companies’ significant investments in artificial intelligence as well as from the One Big Beautiful Bill Act.
- President Trump’s tariffs have paid off for the U.S. in the early going with a series of favorable trade deals, billions of dollars in additional revenue and limited disruption so far to the economy and markets. But it will be months before the full consequences of this trade-war gamble are known, and huge risks remain for consumers, companies and inflation.
- Interest rates are likely to be reduced at the Federal Reserve’s next meeting in September as a result of the worse-than-expected July jobs We expect two quarter-percentage-point rate cuts by year-end – potentially three if inflation remains stable or falls – to lower the benchmark lending rate below 4% for the first time since 2022.
- The Fed vacancy created by the resignation of Federal Reserve Board governor Adriana Kugler sets President Trump up to follow through on his intention to effectively name a “shadow” Fed chair. We believe this would not only undermine Chair Jerome Powell but be harmful to the integrity of the Fed and markets. As we have written many times, Fed policy is fair game for criticism; we certainly have criticized it over the years. But it is essential to maintain the central bank’s independence from political considerations.
- Diversification will continue to be important for investors amid continuing uncertainty about the trade war, inflation, rate cuts and the dollar. International stocks’ near-term outlook remains positive due to strengthened company earnings, increased spending and the weak dollar.
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