— Tony Blair
“The art of leadership is saying no, not saying yes.
It is very easy to say yes.”
July was marked by a solid recovery in the US exceptionalism narrative, as sentiment was buoyed by robust economic data releases, a slew of US-favoured trade deals struck in the run-up to Trump’s August 1st tariff deadline, and bumper earnings from the US tech giants. The S&P 500 finished the month up +2.2%, while the tech heavy NASDAQ Composite was up +3.7% (supported by strong post earnings rallies from Meta and Microsoft). With faith in the US economy growing, we also saw a strong recovery in the dollar; the DXY – an index that tracks the performance of USD against a basket of other currencies – rose +3.2% in its best month since 2022 and the first positive month all year. Equity markets across Europe, Japan, and the EM were up in local terms, though the strength of the greenback has weighed on unhedged returns for USD investors.
On the macro front, data released in July pointed to a resilient US economy as both non-farm payrolls (+147k jobs created in June) and the Q2 GDP print (+3.0% annualized QoQ) beat expectations. Inflation also remained sticky, with the Fed’s preferred core PCE measure rising +2.6% YoY; this reflected both the impact of tariffs on domestic prices and solid consumer demand. With all indications suggesting economic activity was holding up, and despite ongoing pressure from Trump to cut, the Fed left rates unchanged (4.25%-4.50%) at their end-of-month policy meeting. This decision was accompanied by a fairly hawkish tone, with Powell signaling that rates could remain at these levels until September. Treasury yields were already under pressure due to concerns around the sustainability of US fiscal policy (Deutsche Bank’s US economists see the fiscal deficit widening to 6.5-7% over the next few years as the Big Beautiful Bill leaves its mark) and a hawkish Fed only served to consolidate the moves; the US 10Y finished the month at 4.37%. Rates across the Atlantic also rose as the ECB delivered a hawkish hold too.
Throughout July, trade deals between the US and Vietnam, Indonesia, the Philippines, Japan, the EU, and South Korea have been announced, something that Trump has loudly touted on Truth Social. The last four of those deals were reached within 10 days of the August 1st deadline – the date upon which the suspension of Trump’s previously announced reciprocal tariffs were to be lifted (a date that had been pushed back from July 9th and has subsequently been pushed back to August 7th). That said, in the manner of many things Trump has claimed to have achieved on social media, there is little clarity on the details; questions remain around the scope of these deals, the timelines, the enforceability of certain features, and even whether a deal has actually been agreed in some cases (the terms of the deal with Vietnam announced by Trump seemed to catch the Vietnamese negotiators by surprise)…
Nonetheless, this comes across as a solid win for the POTUS and it is hard to dispute the effectiveness of his negotiation tactics in getting what he wants. Japan, Korea, the EU, and Vietnam are all major trade partners of the US, and Trump has managed to impose substantial import tariffs on their goods – 15% for South Korea, the EU, and Japan and 20% for Vietnam – while giving up little in return and securing additional concessions. Indeed, as part of these deals, both Japan and South Korea have committed to investing substantially into the US ($550bn for Japan and $350bn for South Korea), with “90% of the profits” from these commitments supposedly accruing to the United States, according to President Trump (though there are few details around how this is expected to manifest). The EU’s deal is particularly tough. In exchange for a ‘reduced’ 15% baseline tariff ceiling on EU goods imported by America – a flat rate that would include the important automobile sector but would not affect special tariffs on steel, aluminium, and copper – the EU has committed to investing nearly $600bn into the US, purchasing $750bn of energy from the US over the next few years, and reducing its own tariffs on cars imported from the US… Quite the outcome. Given the terms, it is of little surprise that the deal shaken on by Ursula von de Leyen has been met with widespread condemnation from European leaders. French Prime Minister Bayrou’s statement that “it is a dark day when an alliance of free peoples, united to assert their values and defend their interests, resigns itself to submission” sums up sentiment nicely.
Although the flurry of dealmaking activity has made good headlines, it is important to remember that only a select few deals have actually been struck since the initial tariff deferral in April, a far cry from the “90 deals in 90 days” promised. Countries not on this exclusive list (i.e., most of them) are set to have much steeper rates imposed on August 7th, as enabled by the executive order signed by Trump yesterday. Some of the more significant rates advertised include 25% for India, 35% for Canada, and an unexpectedly high 39% for Switzerland. Having seemed like a distant dream for much of the last few months, markets are starting to wake up to a newer, harsher reality, where even best case outcomes are likely to leave barriers to global trade at the highest level they have been in living memory. To exacerbate concerns, July’s non-farm payroll data (released today) came in at +73k and was accompanied by significant downwards revisions to the May and June prints, as well as a slight tick up in the unemployment rate; this paints a significantly weaker picture of the US jobs market and the overall strength of the economy.
As a result, it is no surprise that sentiment has really soured on the first day of August; yields have collapsed – the US 2Y yield, which is highly sensitive to expectations about the path of policy rates, has fallen 21bps to 3.75% – and global equity indices are flashing red. The potential for negative surprises on the trade or economic front remain high and, with valuations across risk assets still near their highs, the next few months are likely to be rocky. Investors should position carefully and we expect gold to remain a valuable hedge against volatility. It is certainly doing well today.
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch
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