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5 Aug 2025 | 3 minutes to read
US President Donald Trump unveiled his latest trade tariff salvo last week, signing an executive order to impose an array of levies on goods from more than 90 countries. The move comes after his 1 August deadline for trade partners to strike deals with the US passed. However, there will be a very small window for further negotiation as the White House said most of the latest measures will take effect from 7 August rather than 1 August. The exceptions to this include Canada, where the new 35% rate (up from 25%) took effect immediately. Although, most goods traded with Canada are covered by the pre-existing US-Mexico-Canada trade agreement. Elsewhere, a deadline of 12 August has been set for China, after Beijing and Washington previously agreed to extend their trade war truce. Additionally, the deadline for a tariff deal with Mexico was extended by another 90 days. The rather hotchpotch nature of the tariffs and their potential fluidity makes assessing the impact challenging. But US tariffs have increased from an average of c.2.5% at the beginning of the year to c.17% – the highest level since the mid-1930s. Trump’s initial ‘Liberation Day’ tariff announcement in April sparked an equity market sell-off. Despite a pull-back late last week, the reaction appears more muted this time around. Agreements reached with the EU and Japan, as well as the de-escalation of the trade dispute with China, have seemingly calmed market jitters for now. Nevertheless, the extent to which tariffs start filtering into inflation prints and influencing central bank policy making will be very carefully monitored.
Some doubts remain over the legal basis for Trump’s tariffs. Trump has imposed the levies using the International Emergency Economic Powers Act (IEEPA), legislation usually reserved for sanctions and freezing criminal assets – not to address trade imbalances. Whether Trump can invoke emergency powers to reshape US trade without consulting Congress is the key point of contention. A hearing at the US Court of Appeals for the Federal Circuit on 31 July was adjourned, with the losing side very likely to take the case to the US Supreme Court. If Trump were to lose, the prospect of tariff revenues collected since 2 April – an estimated $120 billion – having to be repaid becomes a possibility. However, the US administration may not mind too much if they are deemed to have overreached. By the time a final verdict is reached, many countries could have willingly signed US trade deals, whether under perceived duress or not.
The US Federal Reserve (Fed) kept interest rates unchanged at 4.25%-4.50% at the latest meeting of the rate setting Federal Open Markets Committee (FOMC) last Wednesday. Fed Chair, Jerome Powell’s, initial post-meeting comments suggested that rates were likely to be kept steady through the next meeting in September as well, despite Donald Trump’s repeated calls for borrowing costs to be slashed.
However, in an unusual show of dissent, two Fed governors voted against the decision, stating that they would prefer to cut rates by 0.25%. Any level of formal opposition is rare – with this occurrence the first time two members of the board have formally dissented on an FOMC decision in more than 30 years. The move suggests that support for lower rates may be building. Most Fed policymakers have preferred to sit tight in the hope that the impact of tariffs on both inflation and economic growth become clearer. The concern of those calling for lower borrowing costs is that economic momentum may be slowing, representing a risk to the employment element of the FOMC’s mandate. The decision to hold rates came shortly after second-quarter US GDP data suggested weaker consumer spending had contributed to slower annualised growth of 1.1% over the first half of 2025, compared to 2.9% over the second half of 2024. And US labour market data released on Friday suggested a notably weaker picture over the past three months. The closely watched non-farm payrolls print suggested 73,000 jobs had been added in July, but there were sharp downward revisions of -258,000 to prior months, meaning only 106,000 posts were added from May to July, compared to the 380,000 added over the previous three months. Futures markets moved to price in an extra rate cut over the coming year, forecasting four 0.25% cuts by next June. And the odds of a September cut greatly increased. Short-term US government debt rallied, pushing yields downward.
UK retailers continue to face a tough summer according to a downbeat survey from the Confederation of British Industry (CBI), as retail sales volumes declined for the tenth consecutive month. July’s reading was an improvement from June but still came in below expectations. The data suggests UK consumer spending remains subdued as rising prices and economic uncertainty weigh on sentiment. A separate survey from the British Retail Consortium showed food prices rose +4% year-on-year in July, ahead of the prevailing rate of inflation. Sharp increases in meat prices helped drive the headline figure.
Meanwhile, UK consumer credit growth is picking up. Net borrowing of consumer credit rose to £1.4bn in June according to the Bank of England, the highest level in five months, with credit card borrowing jumping to £0.7bn from £0.2bn. This may signal a growing strain on UK consumers, reinforcing a difficult environment for the retail sector.
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