ING Economic and Financial Analysis | Jul 05, 2025 03:31AM ET
US President Donald Trump’s 90-day trade reprieve is ending. Tariff noise is back, but does it really matter? US inflation has stayed surprisingly benign and the economy is holding up, despite the rollercoaster so far. But expect that to change, writes James Smith, as he and the team tackle another big week in the world of macro and markets
We end the week with President Trump threatening to unilaterally ramp up tariffs on a swathe of major trading partners, which he says could range from 10% to 70%. Vietnam – a country with one of the most sizeable trade surpluses with the US – has already seen its tariffs doubled. You’d be forgiven for thinking this is all a bit ‘Liberation Day 2.0’.
Investors have, of course, seen this show before. It’s not the first time that the US administration has upped the ante days before a deadline – just think of the EU and the threat of a 50% tariff just a few weeks ago.
It’s not that markets are completely immune to tariff noise altogether, and my colleague Chris Turner writes that EUR/USD is priced for more volatility over the next three weeks. I've felt for a while that the current level of tariffs – around 14% if averaged out across everything the US imports – probably represents a floor rather than a ceiling.
But if I had to guess, most investors are probably expecting next week's end to the 90-day delay to April’s reciprocal tariffs to come and go without any major drama. That’s our view too.
Whisper it, but things actually don’t look too bad from the perspective of the US administration right now. The S&P 500 – perceived to be a key bellwether within the White House – is at all-time highs (though best not to mention the dollar). The economy has largely held up, abstracting from import-related noise in the GDP figures. And inflation so far hasn’t taken off in any meaningful way.
All the while, the US is collecting huge sums of tariff revenue – something that will have indirectly helped the passage of Trump’s tax bill. And so long as talks continue, trading partners like the EU have been reticent to retaliate in full.
Here’s the question, though: has the economic impact of tariffs genuinely been less bad than just about everyone feared earlier this year? Or is everything just happening with more of a lag?
When it comes to inflation at least, James Knightley firmly thinks it’s the latter. The Fed’s preferred inflation gauge, the core PCE deflator, has been surprisingly benign for three months now. But when we get June’s data later this month, James K thinks that will change – and even more so when we get the numbers for July and August.
We know from tariffs in Trump’s first term that it took a good three months or so for the effects to show up fully in prices. And this time around, American companies saw the tariffs coming and filled every ounce of warehouse space with stock. That inventory buffer has potentially offered companies, particularly those lacking pricing power, a window to ‘wait and see’ before lifting prices. But that window won’t last forever.
The potential for a summer of hot inflation is the principal reason why we’re not expecting a September rate cut from the Fed, despite it being near-enough priced into financial markets. We’re looking for a November, or more likely December restart on Fed easing.
As for the economy generally, the jury’s out on whether we’re still waiting on the worst of the tariff hit. The delay in China’s tariff levels probably came just in time to avert a more serious recessionary threat. The latest jobs report certainly doesn’t point to the bottom falling out of the labour market, though if we’re talking about time lags, this is usually the last place economic damage shows up. Sentiment remains fragile, remember. Tariffs have taken the wind out of the sails of the US economy.
That points to more muted growth rates from now on and that's particularly problematic for America’s perilous public finances. My colleagues think that The One Big Beautiful Bill Act, passed this week, if anything, looks like an economic headwind. They write that the bond markets may be getting too complacent, given the potent combination of higher inflation and a wave of debt issuance later this summer.
Here in Europe, the threat of tariffs is manifesting itself in an unexpected opponent for the European Central Bank: a stronger and more volatile euro. A drumbeat of comments from ECB officials this week suggests that EUR/USD at 1.20 (a level that investors were flirting with before Thursday’s hawkish US jobs numbers) might represent an informal line in the sand.
Frankfurt was already getting more nervous about the downside risks to inflation back at the June meeting, as this week’s minutes demonstrated. Carsten reckons a stronger euro only solidifies a September rate cut. An unexpected increase in US tariffs on the EU next week would only build that case further.
Source: Macrobond, ING
Source: Refinitiv, ING
Source: Refinitiv, ING
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