Market Monitor | Mid-Month Update
Headlines and Highlights
- U.S. tariff warnings reaccelerate: President Trump has stepped up pressure on U.S. trade partners since signing his $3.4 trillion tax-and-spending bill into law July 4th. Trump threatened to impose $163 billion of additional import tariffs on the European Union, Mexico and other partners as of August 1st – a 60% increase over the total in place since April. The move to reapply pressure comes after a lengthy delay while the administration secured fiscal aid from the megabill to offset tariffs’ negative impact. The new law also extends 2017 tax cuts and partially pays for them by cutting spending on Medicaid and other safety-net programs.
- Small caps lead market to start second half: Smaller-company stocks extended their recent momentum with strong gains in the first half of July to forge into positive territory for 2025 (+1.6%) after lagging the market for most of the year. The iShares Russell 2000 ETF added 3.5% to lead other asset classes. Large caps as measured by the iShares S&P 500 gained 1.1% and were up 7.3% year-to-date. International developed stocks paused their huge 2025 runup, edging down 0.7%, but retained a market-leading 19.5% return for the year. Bonds were pressured by rising yields; prices move opposite from yields. Taxable bonds fell 0.9%.
- Inflation starts to heat up amid tariffs: Core consumer prices edged up to their highest level since February as new U.S. import tariffs appeared to filter increasingly into the economy. The core Consumer Price Index – excluding the volatile food and energy categories – ticked up to 2.9% from 2.8% in May. Headline consumer prices accelerated to 2.7% from 2.4%, still relatively modest but further from the 2% target. Tariffs’ full impact remains unclear, but prices rose in June for furniture, clothing and other tariff-sensitive items.
Chart of Interest
Key Takeaways
- Federal Reserve Chair Jerome Powell is facing ever more public pressure from President Trump to lower interest rates to stimulate the economy. We expect the Fed to keep the benchmark federal funds rate at the current level of 4.25%-4.5% on July 30th before likely reducing it at its next meeting in mid-September, when tariffs’ impact on inflation should be more fully known.
- Corporate profits are anticipated to have grown by 4.6% in the quarter just completed compared to a year ago despite pressure from tariffs, according to FactSet research as earnings reporting season gets under way. Analysts have scaled back their expectations from 9.2% at the end of March as many companies have suspended earnings guidance until there is more clarity on tariffs. The second quarter was the first hit by high tariffs.
- The U.S. job market has been remarkably resilient but is beginning to show some signs of strain. While initial claims for unemployment insurance remain stable and at a healthy level, a climb in continuing claims indicates that laid-off workers are having more trouble finding jobs. A sustained rise in continued claims would be cause for concern, as the consumer accounts for around two-thirds of GDP.
- The dollar has stabilized this month but remains down nearly 10% year-to-date against a basket of other major currencies. The slide has been fueled by concerns about America’s trade policy, inflation and rising government debt.
- Municipal bonds’ performance has begun to improve in recent weeks after languishing for much of the first half due to a higher number of issuances than usual (oversupply) that was prompted by fears that munis’ tax-exempt status might be removed by Congress in the tax bill. (It was not.) Our munis benchmark added 0.2% in early July to reach mid-month up 1.5% for 2025.
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