Weekly focus: Mixed feelings

The mood in financial markets has remained upbeat towards the late summer as peak uncertainty over US trade policies appears to ease. Even if the US July Jobs Report showed that employment growth has been clearly weaker than previously thought, economic surprise indices have otherwise stabilized at neutral or slightly positive levels across all major economies. Risky assets, like equities have performed well while most measures of implied volatility are hovering near long-term median levels.

The array of updated tariff rates, which now cover practically all major US trading partners, took effect yesterday. US importers paid more tariffs for their H1 imports than they did during the entire 2024 despite unusually low import volumes after April's Liberation Day.

Firms have likely drawn down their front-loaded inventories while anticipating further clarity on tariffs. And at the same time, the latest July trade data from China revealed that Chinese firms have diversified their exports towards third countries especially in South-East Asia. But as the broad-based tariffs leave little room for re-routing, US importers will eventually have to accept further increases in tariff costs towards the fall. This week's ISM services index provided sense of the stagflationary risks that might await ahead, as growth in business activity and new orders slowed down while the sub-index for price pressures reached its highest level since October 2022.

The combination of upside risks to inflation and downside risks to growth continues to divide views across the world's central bankers. This week, Bank of England cut its policy rate by 25bp, but the decision was closer than expected, with four out of nine committee members voting against the cut. Read more from our BoE Review, 7 August. 

On the other side of the Atlantic, Trump nominated Stephen Miran to temporarily fill the vacant seat in the FOMC after Adriana Kugler stepped down from the Board of Governors last week. Miran, who is known as a Trump loyalist and as the author of the article outlining the so-called 'Mar-a-Lago accord', has downplayed the inflation risks related to tariffs and called for structural reforms within the Fed. The nomination will still need to be approved by Senate, which reconvenes after its summer recess on 2 September. While his term will last only until the end of January, he will likely be among the candidates for the next 14-year term as well. The search for Fed chair Powell's successor continues as well, and after Treasury Secretary Scott Bessent ruled himself out of the considerations, top contenders include Christopher Waller, Kevin Warsh and Kevin Hassett.

On the geopolitical front, Trump is scheduled to meet Russian President Putin over the coming days to discuss the war in Ukraine, after US special envoy Witkoff visited Moscow this week. The exact time and location of the meeting are still unclear, but we remain doubtful that major breakthroughs will be reached. US imposed an additional 25% tariff on India yesterday to curb the country's imports of Russian oil.

Next week, the focus will remain on the US as the July CPI is due for release on Tuesday. We expect headline inflation to land at +0.2% m/m SA (2.8% y/y) but core inflation to accelerate to +0.3% m/m SA (3.0% y/y) as tariff costs ramp up.

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