Deal or no deal?

• Equities, especially US which advanced +2.2% in sterling terms
• Gold added 1.9% in dollar terms

• UK gilts and US treasuries fell -0.4% and -0.2% respectively
• UK index-linked gilts slid -1.2% (all bonds in local currency)

Trade war tensions reignite this week. Reciprocal US tariffs ranging from 11% to 50% were set to take effect at 12:01am on 9 July but most countries now have a reprieve until 9 August. Trump’s team has sent fourteen countries letters, including Japan and South Korea, outlining what their tariff rates will be. However, formal deals remain to be struck. Markets are watching key trading partners closely, including the EU, Japan and India.

With this week’s meeting in Brazil of the BRICS bloc of developing countries, which includes Brazil, Russia, India and China, Trump has threatened an additional 10% tariff on countries aligning with what he calls the “anti-American policies of BRICS”.

The US has already reportedly finalised a trade deal with Vietnam. US importers will pay a 20% tariff on Vietnamese goods and 40% on those routed through Vietnam from other countries. Vietnam agreed not to impose import duties on goods from America. Only China and the UK have also reached an agreement of sorts with the US. The weeks ahead will be uncertain.

US labour market figures continue to suggest underlying strength. The closely-watched non-farm payrolls print showed the economy added 147,000 jobs in June, while the unemployment rate declined to 4.1% from 4.2% in May. The gains beat forecasts of 110,000 but were narrow, with almost half from state and local government sectors and healthcare. Manufacturing and retail jobs declined, suggesting softness developing in the private sector. Firms may be turning more cautious on hiring, with employers seemingly more reluctant to take on new staff or replace leavers.

The upshot for monetary policy is that the US Federal Reserve’s (Fed) ‘wait and see’ stance is expected to continue. Despite trade policy uncertainty, inflation is not significantly higher, and the US labour market appears resilient. Covid-19 related labour shortages and the Trump administration’s tough stance on immigration may mean companies are also loath to fire staff. And while inflation is relatively cool, we expect that tariff-related inflation may begin to filter through in the coming months. The Fed remains data dependant, but current expectations are that they will tentatively resume rate cuts before the end of the year, perhaps from September. The Fed have held rates steady since last December.

Trump signed into law his “Big Beautiful Bill” last week after it passed through Congress. While the extension of tax breaks may be business and market friendly, its scale may jeopardise the long-term sustainability of US government borrowing. The bill is expected to add some $3 trillion to national debt, which is already 124% of GDP. The US yield curve has gradually steepened as investors demand greater compensation for lending to the US government longer-term. The US dollar has also been steadily weakening against other major currencies this year. Without action to address the worsening budget deficit – the difference between government revenues and total spending each year – the situation could worsen without strong economic growth. Whilst Trump’s bill does include some spending cuts, these were not as significant as some had hoped and they were outweighed by tax cuts. Trump lauded the growth potential of the bill, stating that it would “turn this country into a rocket ship”.

US equities continued their strong run with the S&P 500 and Nasdaq last week gaining +1.7% and +1.6% respectively, closing at record highs. Optimism was fuelled by a stronger than expected jobs report and the Senate’s approval of Trump’s “Big Beautiful Bill” reinforcing confidence in the US economy despite fast changing trade policy. Meanwhile, the VIX – a key measure of equity market volatility – remains subdued and near four-month lows. However, the risk of a pullback looms, particularly if trade negotiations sour.

The cost of Labour’s climb-down on welfare cuts last week jeopardised Chancellor Reeves’s fiscal rules and possibly her job. The rules commit Labour to neither raising income tax nor borrowing to fund day-to-day spending. But the headroom to achieve this has all but evaporated. 10-year gilt yields jumped by 0.15% to ~4.65% and sterling-dollar weakened slightly below 1.37. Reeves is perceived as relatively market-friendly and therefore pro-financials (banks and life insurers). Her departure might therefore raise the risk of a new tax on financials to help the government balance its books. Even if the 10-year gilt yield had not settled back towards 4.5%, its impact would have been relatively modest. Higher long-term interest rates are - all things equal - a net positive for banks’ net interest margins (their profit between deposit and loan rates); for life insurers, higher rates may reduce the value of their liabilities due to an accounting quirk. UK life insurers are among the biggest dividend payers in the FTSE 100.

• The Organisation for Petroleum Exporting Countries and its allies (OPEC+) will raise production by 548,000 barrels per day, despite weakening growth forecasts
• The US Federal Reserve would have resumed cutting interest rates by now were it not for uncertain US trade policies, according to Chair Powell
• US-Canada trade talks are to restart after Canada revoked a digital services tax
• Microsoft announced that it will cut 9,000 jobs as it invests more into artificial intelligence (AI)
• China’s services and manufacturing activity is just-about growing according to data provider Caixin. Services PMI dropped to 50.6 (51 expected), but composite data rose to 51.3 (from 49.6). A number above 50 signifies expansion

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