Strong earnings reports and news of more trade deals struck with the U.S. helped continue their march higher last week, with all three major US indices notching gains. Late last week, the Trump administration announced it had reached a deal with Japan. The deal included promised investments by Japan in the U.S., but the centerpiece of the agreement was setting tariffs at 15 percent on goods, including automobiles, imported from Japan.
Before the deal, levies on vehicles imported from the country were subject to section 232 tariffs of 25 percent. That deal was followed by an announced agreement on Sunday with the European Union (EU). Investors reacted to the Japan news and expectations that a deal would be made with the EU by bidding up stocks, as the new tariff rates are lower than the level initially proposed on April 2, when the administration announced what it dubbed reciprocal tariffs. It was also seen as potentially establishing a framework for future deals with major trading partners ahead of the August 1 deadline the administration has set.
To be sure, the deals agreed upon bring the tariff rates on the two countries below levels announced in April, yet they are much higher than the levies that were in force prior to April. These latest deals along with the tariffs still in effect on steel, aluminum and bring the average trade-weighted tariff rate on all goods from trading partners around the globe closer to 20 percent than 10 percent—a level that would have been viewed as significant before the first round of global levies were announced. However, the level is largely being met with a shrug likely for two reasons: First, as more deals are reached, uncertainty surrounding what the trade-weighted level of levies has diminished; and second, the impacts of the levies have mostly shown up in survey data and not hard figures such as jobs reports and inflation data.
Where uncertainty remains—and what some investors may be overlooking—is the fact that it is still unclear how the tidal shift in trade policy will ultimately play out in the economy. Last week brought more signs of the higher trade costs seeping into hard data and leading to additional bifurcation in the economy. To date, most of the impact has not shown up on Main Street. It is unclear if that can continue over the long haul.
Several companies have come out this earnings season reporting the effect tariffs are having on financial results. For example, net income for General Motors (NYSE:) tumbled 35 percent in the most recent quarter due to $1.1 billion in additional costs due to tariffs, according to the company. Toymaker Mattel (NASDAQ:) has come out with estimates that tariffs will cost the company $100 million for the year. We note these examples not as a judgement of the administration’s trade policies but to highlight that, so far, companies have been willing to bear the brunt of higher costs from imported raw materials and goods. The longer the duties are in effect, the greater the risk is that companies will start to attempt to pass along increased costs to consumers. Additionally, now that more and larger trade deals are being inked, companies that previously had taken a wait-and-see approach before hiking prices may no longer feel the need to hold off.
In the meantime, while has remained relatively mild, soft data shows trade policy is reopening the economic gap between businesses/sectors that are doing well and those that are struggling due to elevated and higher costs. The latest from S&P Global, which we detail later in the commentary, shows that manufacturers are facing a steep rise in input costs and that the demand that was pulled forward as customers tried to get ahead of tariff-related price increases has led to weaker demand in the months since. At the same time, we believe absent an abrupt deterioration of the job market, the Federal Reserve will likely be hesitant to until it has a better understanding of whether tariffs will cause a one-time uptick in prices or a sustained rise in inflation. As such, we believe this will continue to strain areas of the economy, such as real estate, that have already been feeling the effects of high interest rates.
It is possible that as more trade deals are announced, the level of uncertainty that has hovered over business and the economy will ease. Additionally, the impact of final trade deals could be less than originally forecast after the April 2 announcement of reciprocal tariffs. Similarly, easing of regulations and stimulative policies included in the recently passed tax and spending bill, such as immediate expensing of capital expenditures for businesses, are expected to boost growth. Simply put, we believe it may take several more months before investors know for sure the extent to which the administration’s efforts to change the global economy and the role of the U.S. in trade will impact domestic growth. As a result, we still believe it is too early to sound the all-clear.
Wall Street Wrap
Mixed picture of economic growth: Preliminary data from the latest S&P Global Purchasing Managers Index (PMI) showed that the pace of overall growth accelerated in July. The latest report, which tracks both the and sectors, shows that the came in with a reading of 54.6 (levels above 50 signal growth), up from June’s final reading of 52.9 and now at the highest level in seven months. While the pace of growth improved, details show signs the economy is heading back to the type of bifurcation seen throughout most of 2024.
came in at 49.5, down 3.4 points from June’s final reading and the lowest level in seven months. The Manufacturing Output Index fell 1.9 points to 51.2, the lowest level in two months. It’s worth noting that the inventories index declined in July after two consecutive months in which building inventories led to growth in the sector. At the time, we had noted that the stockpiling of inventories may have been a sign of customers buying ahead of expected price increases tied to tariffs. Meanwhile, the Services Business Activity Index came in at 55.2, up 2.3 points from June and the fastest pace in seven months. The lack of balance in the growth raises concerns that the uptick could fizzle, according to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “Whether this growth can be sustained is by no means assured. Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running,” he said.
New orders rose again on the services side of the economy but dipped marginally for manufacturers. While the contraction in orders for manufacturers was modest, it marks the first time since the end of 2024 that orders declined. Final new orders numbers were once again hurt by exports, which declined at the fastest pace since April when the reciprocal tariffs were announced. The latest reading marks the third time in the past four months that exports fell.
Input and selling prices for manufacturers jumped, with goods prices rising mostly due to tariffs but also some signs of wage pressures adding to costs. Nearly two-thirds of manufacturers reported facing higher input costs stemming from tariffs. Overall, average prices charged for goods and services rose at a rate just below that of the recent high recorded in May and the second sharpest monthly increase since September 2022. Input costs, meanwhile, rose at the second-quickest rate since January 2023, led by cost hikes on the manufacturing side of the economy. “The rise in selling prices for goods and services in July, which was one of the largest seen over the past three years, suggests that will rise further above the Federal Reserve’s 2% target in the coming months as these price hikes feed through to households,” Williamson said in comments released with the report.
Hiring was mixed, with manufacturers trimming payrolls in response to easing backlogs. Conversely, the services sector added employees at the quickest pace since January as backlog orders grew at the fastest pace in more than three years.
Capital spending declines: Preliminary results for May showed that fell for the second time in three months, declining 9.3 percent compared to a 16.5 percent rise the previous month. While economists often shrug off this volatile number, the report also contains nondefense capital goods orders and shipments, excluding aircraft, that are viewed as proxies for overall business spending. That measure declined 0.7 percent after rising 2 percent in May. Nondefense capital goods shipments excluding aircraft rose 0.4 percent after rising 0.5 percent the previous month.
Forward-looking indicators point to challenges for the economy: The latest Leading Economic Indicators (LEI) report from the Conference Board weakened modestly, and the measure is signaling an increased risk of a recession. The June LEI reading showed a decline of 0.3 percent after May’s final reading was unchanged from the prior month. The reading is now down 5.4 percent on an annualized basis over the past six months, weaker than the six-month annualized decline of 5.0 percent reported in May. The six-month diffusion index (the measure of indicators showing improvement versus declines) faltered, registering 40 percent, marking the third consecutive month of the levels that historically have coincided with recessions. Historically, when the six-month annualized LEI falls below –4.1 percent and the six-month diffusion index registers below 50, it indicates the economy is in or on the cusp of a recession. However, both criteria were met in 2024, leading many, including us, to expect a recession that never materialized. For the fourth consecutive month, negative consumer expectations weighed most heavily, followed by a decline in new orders for manufacturers. However, a rise in stock market performance helped offset some of the total weakness from the various indicators measured. Despite the measure warning of a potential economic contraction, “the Conference Board does not forecast a recession, although economic growth is expected to slow substantially in 2025 compared to 2024. Real GDP is projected to grow by 1.6 percent this year, with the impact of tariffs becoming more apparent in H2 [second half] as consumer spending slows due to higher prices,” Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators at the Conference Board, noted in remarks released with the report.
Existing home sales fall: The National Association of Realtors reported that in the U.S. declined 2.7 percent in June to a seasonally adjusted annual rate of 3.93 million units. The decline marks the third time in four months the sales have fallen. Easing demand was widespread, with three out of four regions reporting declines. Only the West region saw an increase for the month with 1.4 percent more units sold than in May. On a year-over-year basis, sales of existing units were flat.
The inventory of unsold homes was 1.53 million units, down 0.6 percent from May, but an increase of 15.9 percent from year-ago levels. Unsold inventory is equal to a 4.7-month supply. Historically, a six-month supply of inventory is consistent with moderate price appreciation. The latest inventory numbers suggest prices may continue to climb but at a slower pace. Despite the decline in sales, the median price for existing single-family homes rose to $441,500 in June, an increase of 2 percent from year-ago levels.
New home inventory grows faster than sales: The latest data from the Census Bureau shows new home inventories grew 1.2 percent in June to 511,000. On a year-over-year basis, the inventory of new houses is up 8.5 percent. The current number of new dwellings represents a 9.8-month supply of units, which is a historically high level. With the exception of a few months during COVID, the latest inventory is at the highest level since the stretch from March 2008 through May 2009. Meanwhile, sales of new houses grew by 0.6 percent in June to a seasonally adjusted annualized rate of 627,000 units. However, sales are down 6.6 percent from the seasonally adjusted annualized rate from a year ago. Taken with the existing home data, demand for housing appears to be weakening, which may be tied to consumers pulling back on spending. Should the trend continue, it could offer relief for home buyers, who have seen prices continue to rise even as mortgage rates have stayed elevated.
Continuing jobless claims stay elevated: The latest data from the Department of Labor shows that (those people remaining on unemployment benefits) stand at 1.955 million, up 4,000 from the previous week’s downwardly revised total. The four-week rolling average of continuing claims came in at 1.954 million, a decrease of 2,250 from last week. Meanwhile, were at 217,000, a decline of 4,000 from the previous week’s unrevised total. The four-week moving average of initial claims numbered 224,500, down 5,000 from last week’s revised total. As we’ve noted in the past, we believe continuing claims are a more reliable indicator of the labor market, as they measure workers who are facing long-term challenges in finding a job and, as such, filter out some of the temporary noise that can be found in initial claims data.
The Week Ahead
Tuesday: The Conference Board will release the report for July in the morning. Last month, consumer confidence dropped. Given the Federal Reserve’s ongoing focus on the employment picture, we will continue to focus on the labor market differential, which is based on the difference between the number of respondents who believe jobs are easy to find and those who report challenges in finding work. We’ll be focusing on whether ongoing tariff negotiations are continuing to weigh on consumers’ minds.
The S&P CoreLogic Case-Shiller Index of property values covering May will be released. Prices overall have moved higher, albeit at a slower pace, in the past several months. We will be looking to see if the pace of home price appreciation continues to slow.
Wednesday: The focus for the day will be on the Federal Reserve as it releases its statement following the latest meeting of the Federal Open Markets Committee (FOMC). The Fed is widely expected to leave unchanged. We will be listening to Federal Reserve Chairman Jerome Powell’s post-meeting press conference for insights into how the Fed interprets the latest data now that tariffs have been in place for several months. President Trump has been highly critical of Chair Powell and has been vocal about his belief that the Fed should already be cutting rates. We’ll be watching to see if Powell addresses the criticism. We’ll also be on alert for potential dissenting votes if rates are held steady and will be listening for the FOMC’s views on the balance of risks to each side of its dual mandate of full employment and price stability.
The Bureau of Economic Advisors will release its first estimate of gross domestic product growth for the second quarter. Estimates put overall economic growth at 1.7 percent, following a 0.5 percent drop in the first quarter. Last quarter’s decline was driven by a spike in imports, which are subtracted from . We’ll be looking to see how the implementation of tariffs affected imports and overall growth.
Thursday: The June Personal Consumption Expenditures Price Index from the Bureau of Economic Analysis will be out in the morning. This is the preferred measure of inflation used by the Federal Reserve when making decisions. Recent inflation readings have been mild, but we have started to see a rise in goods prices. We will be watching to see if this trend continues, as tariffs have begun to work their way into the economy.
Initial and continuing jobless claims will be out before the market opens. Continuing claims have been rising of late even as initial claims have declined, and we’ll continue to monitor this report for signs of changes in the strength of the employment picture.
Friday: The Bureau of Labor Statistics will release its Jobs report for July. Last month’s report showed the U.S. economy adding about 147,000 jobs and the unemployment rate declining to 4.1 percent. However, hiring in private industry was sluggish and weak among industries hiring. We’ll be looking to see if there has been a change in those trends.
The Institute for Supply Management will release its latest Purchasing Managers Manufacturing Index. Last month saw manufacturing contract for the fourth consecutive month, while prices moved higher. We will be watching to see if the latest data points to continued rising costs or changes in the pace of growth.