Five fundamentals for the week: Investors eye tariff circus and US inflation data

Which country will be the next to receive a letter from America? United States (US)  President Donald Trump has been extending his tariff threats through the weekend. Has the US economy felt the consequences of levies already imposed? These are the topics for another hot summer month.

1) Are markets underestimating Trump's tariff threats?

Trump wasted no time over the weekend and threatened the EU and Mexico with 30% tariffs from August 1. He added that any retaliatory measure could imply even higher duties. This development comes after similar talk against some two dozen countries, including Japan, South Korea, Canada and Brazil – all large trade partners.

There is a pattern around these threats: Stocks drop, the relevant currency slides, but these dips are bought quickly. This is called the Trump Always Chickens Out (TACO) trade. Investors are sure that Trump will eventually take a step back from the brink and agree to lower levies and delay the deadline.

The "reciprocal tariffs" the president announced on "Liberation Day" were supposed to come into effect on April 9. On the same day, he announced a 90-day delay to July 9, and the new deadline is August 1.

But are investors too complacent? I expect a panic attack only if these duties come into effect. With some two weeks to go, dip-buying seems like a more likely scenario.

2) Chinese GDP set to show healthy growth despite tariffs

Tuesday, 2:00 GMT. Did the trade war hit China's economy? Probably not, or at least not significantly. The Gross Domestic Product (GDP) report for the second quarter will provide answers.

While many doubt the accuracy of figures coming out of Beijing, there are good reasons to expect some strength. Trade with the US dropped, but China has been able to reroute some shipments destined for America via Vietnam or other locations. In addition, sales of electric vehicles to Europe and higher internal consumption boosted economic expansion as well.

The economic calendar points to an increase of 5.1% YoY in the second quarter, close to 5.4% reported for Q1. There could be a small upside surprise, benefiting the Aussie (AUD) and global Stock markets.

3) US inflation set to show a bump up in core prices

Tuesday, 12:30 GMT. Have prices risen in response to tariffs? America's average duty rate has increased substantially, but not all price hikes reach consumers. Why? Some retailers front-ran the tariffs and are still selling goods imported before levies were in place. In other cases, sellers absorb the costs of tariffs.

However, at some point, inflation is set to rise, and the Consumer Price Index (CPI) report for June could provide some insights. The markets and the Federal Reserve (Fed) focus on core CPI, which excludes volatile energy and food prices.

After a few months of small price increases, such as 0.1% in May, a faster rise of 0.3% is on the cards for June. Any higher figure would boost the US Dollar (USD), while another month of minor gains would support Stocks and Gold.

4) UK inflation may strengthen the notion of British stagflation

Wednesday, 6:00 GMT. UK headline CPI jumped in April due to a change in government-mandated energy prices. But, it remained stubbornly elevated in May, at 3.4% for the headline and 3.5% for core CPI.

Economists expect core CPI to stick to 3.5%, partly due to higher wages. The data feeds into the next decision by the Bank of England (BoE), which is a "Super Thursday" decision including the BoE's quarterly report.

A decline toward 3% would be a blessing for Brits but weigh on the Pound (GBP), while an increase en route to 4% would boost Sterling.

5) US PPI will help shape Fed expectations

Wednesday, 12:30 GMT. The Producer Price Index (PPI) report plays second fiddle to CPI data, but these figures feed into calculations of the Personal Consumption Expenditures (PCE) – the inflation figures that the Fed prefers.

Core PPI rose by 3% YoY in May, and a similar outcome is on the cards for June. That is above the 2% the Fed aims for core PCE, but far from worrying.

However, an accelerated rise in prices at factory gates would show that higher duties already push costs at the producer level. Another benign report would keep people perplexed.

6) US Retail Sales

Thursday, 12:30 GMT. Roughly two-thirds of the world's largest economy is centered around consumption. While headline retail sales dropped by 0.9% MoM in May, the Retail Control Group – aka "core of the core" – rose by 0.4%, showing that the consumer keeps shopping.

The economic calendar points to 0% change in headline sales in June. That implies that markets could jump to either direction on a surprise. I expect a small retreat, especially in the control group.

7) US consumer sentiment

Friday, 14:00 GMT. The last event for the week is forward-looking – the University of Michigan's preliminary Consumer Sentiment Index for July provides insight about how Americans are feeling.

The index rose from the depths near 50 to 60.7 in June, and a similar figure is on the cards for July. Given stable gasoline prices, there is room to expect an increase in sentiment.

It is essential to note that there a loose correlation between soft data such as this survey and actual consumption. Nevertheless, this is a market mover, at least in the short term.

Final thoughts

While there are several heavy hitters this week – most notably US CPI which we will cover live – markets are set to shake by Trump's attention-grabbing tariff headlines. These can come at any time of day.