Busy Week Ahead for US Economy

STOCK INDEX FUTURES

Stock index futures are higher after the US and EU reached a trade agreement, avoiding a trade war with the US’s largest trading partner. The deal sets a 15% baseline tariff for European goods, including automobiles, while President Trump added that the EU would buy $750 billion of energy products from the US and invest an additional $600 in the US. Trump also said the EU had agreed “to open up their countries to trade at zero tariff.” EU Commissioner Von der Leyen said the two had agreed to zero-for-zero tariffs for certain strategic products, including aircraft and their parts, certain chemicals, semiconductor equipment, and certain agricultural products, among others, and said the two sides would work to add more products to that list. Trump said that pharmaceuticals would not be on that list and would remain subject to potentially higher tariffs, although senior US officials later said that the two sides agreed to a 15% tariff on the EU’s pharmaceutical exports. Trump was also expected to iron out final details of the UK agreement in meetings with British Prime Minister Keir Starmer on Monday. That leaves some of the biggest outstanding deals with Mexico, Canada, and China. US and Chinese officials are set to meet in Stockholm on Monday and Tuesday, where the two sides are expected to discuss extending their trade truce beyond the current August 12 expiration date.

Looking ahead, the Fed meeting, the August 1 deadline, the jobs report, Q2 GDP, and inflation data make up a busy week of economic data paired with a slate of earnings from 164 members of the S&P 500. Big tech giants Apple, Amazon, Microsoft, and Meta will drive the direction of markets to kick off August. Boeing, Coinbase, Exxon Mobil, Chevron, and Starbucks are also among the big names highlighting the schedule. On the data front, any signs of a cooling job market, weakening economy, and deteriorating consumer confidence could increase prospects of a Fed rate cut in September or October.

So far, corporations have been shouldering the burden of tariffs, hurting company profits. Because tariff rates have been so uncertain and volatile, companies have waited on adjusting prices until they get a better picture of what costs their supply chains will face. The import price index, which tracks what importers pay for many foreign-produced goods before tariffs are levied, has held steady in recent months, in a sign foreign suppliers aren’t broadly slashing their prices to offset costs for their US customers. Broader hits to consumers could be on the way. In May, Walmart said that it had started raising some product prices to offset the cost of tariffs and that more price increases would come this summer.

CURRENCY FUTURES

The USD index is higher, broadly gaining against most major currencies as the US-EU trade deal boosted demand for the dollar, as the clarity on the trade picture helped reduce uncertainty that has recently weighed on the dollar. The Fed is expected to hold rates steady later this week, with markets already pricing in a non-event from the meeting, although attention will be paid to Trump’s reaction to the meeting. Labor data, Q2 GDP, and inflation data are all due later this week, which could provide insights into the Fed’s future moves. Any signs of a cooling labor market and weakening economy are likely to add to speculation of a rate cut restart in
September. Any signs of delay of a Fed restart in the rate-cutting cycle could provide support for the dollar.

Euro futures are lower following the announcement of a framework trade pact between the US and EU, avoiding a larger trade war. The deal sees the EU face a 15% tariff on most goods, including cars, semiconductors, and pharmaceuticals, while also investing $600 billion into the US and purchasing $750 billion of energy products from the US. Tariffs at that level are expected to lower the EU’s GDP by 0.3%, with Germany being hit the hardest, dampening auto exports, while France and Spain would be less affected. The 15% baseline tariff will keep average levies at a similar level to what they are currently because they will not be cumulative with the duties that existed before Trump’s return to office this year. The EU has said it is already facing an effective average tariff rate that is close to 15% because Trump’s 10% baseline tariff was stacked on top of the U.S.’s pre-existing tariffs. Looking ahead, the first estimate of Q2 GDP is due on Wednesday, and provisional inflation figures for July are due Friday. GDP is expected to grow 1.2% on an annualized basis, and inflation is expected to remain at 1.9% on an annualized basis. With growth holding up and inflation at its target, the cutting cycle from the ECB may be at an end. German and eurozone manufacturing PMI data will be released Friday.

British pound futures slipped against the dollar in the overnight session while reacting more volatile against the euro as investors digested the announcement of the US-EU trade deal. Inflation in the UK remains sticky, and growth is subdued, leaving investors divided on whether the Bank of England will increase the rate of its interest rate cuts later this year. The BoE meets next week, and markets are fully pricing in a 25 bps rate cut, one of only two more they expect this year. On the data front, consumer credit and mortgage lending data for June is released on Tuesday that could reveal how households are dealing with sticky inflation in the country and the impact of higher rates on housing demand. A final reading of manufacturing PMI for July is due on Friday, while the nationwide house price indicator is also due during the week. The data comes against a backdrop of concerns about a relatively weak economy and further concerns about fiscal sustainability from the government.

Japanese yen futures are lower as the dollar strengthened against most major currencies. The Bank of Japan is expected to keep its policy rate at 0.5% at the end of its two-day meeting on Thursday. The recent trade deal with the US offers some economic certainty, although it more or less reduces uncertainty. Policymakers at the BoJ will likely adopt a wait-and-see approach while they gauge the impact of tariffs on the Japanese economy. The central bank will also release its quarterly growth and prices outlook as well. On the data side, industrial production figures for June are due Thursday and expected to show a further decline in manufacturing. Retail sales for June and auto sales for July, out Thursday and Friday, respectively, will offer insights into household spending, while the June jobless rate is also due Friday. The BoJ will also conduct outright purchases across four sectors of Japanese government bonds. The Ministry of Finance will auction about 2.6 trillion yen of two-year sovereign notes Tuesday, which could draw institutional interest as two-year yields hover near their highest levels since April. Uncertainty over fiscal policy remains and could provide downside risks to the yen after questions about the leadership of the Liberal Democratic Party and coalition changes after speculation that Prime Minister Ishiba could resign in the future.

Australian dollar futures are lower despite gaining after the announcement of a US-EU trade deal, which lifted risk sentiment as markets turn their attention to trade talks between China and the US in Stockholm this week. Focus in Australia will be on the release of Q2 consumer price index data on Wednesday, which is expected to show that inflation is in the bank’s 2%-3% target range. The data will make or break the case for a rate cut next month after the Reserve Bank of Australia kept interest rates on hold this month in anticipation of seeing inflation numbers come in line with expectations. Since keeping the official cash rate at 3.85% this month, the RBA has received data confirming that unemployment is again rising. RBA Governor Michele Bullock said the rise in the unemployment rate to 4.3% in June, which was met with alarm from some analysts, had been anticipated in its forecasts.

INTEREST RATE MARKET FUTURES

Futures are little changed following the announcement of the US-EU trade deal ahead of the Fed’s policy meeting this week, where the bank is expected to leave interest rates on hold. Although two policymakers may dissent from the decision. Instead, market attention will center around the release of the advance estimate of second-quarter U.S. gross domestic product on Wednesday; PCE inflation data, the Fed’s preferred measure, on Wednesday; and nonfarm payrolls figures for July on Friday. The closely watched ISM manufacturing survey for July is also released Friday. Any signs of a slowing labor market, a weakening economy, and a decrease in consumer confidence could add to bets for a Fed rate cut in September or October. However, this will need to be balanced against expectations that tariffs will stoke inflation. As long as the labor market holds up, firmer inflation will likely delay the restart of the Fed easing cycle. Friday will also be the August 1 deadline for the US to impose reciprocal tariffs, with Canada and Mexico still left without a deal. The Treasury will auction two- and five-year notes on Monday and seven-year notes on Tuesday. Market attention will also focus on US-China trade talks.

S&P Composite PMI data pointed to rising wage costs and tariffs directly contributing to steeper input price inflation, which firms passed onto customers. As a result, output price inflation increased, reaching one of the highest levels recorded of the past three years. The lack of labor market deterioration so far, paired with increasing price pressure from tariffs as evident in the PMI data, gives the Fed little reason to consider cutting rates at the July meeting and potentially the September meeting as the bank waits to see how prices are affected by tariffs. US tariffs are at their highest level in 90 years, and the effects will continue to show up late into the summer and beyond, and companies better understand what level of levies their imports will face and price their goods accordingly.

The 10-year Treasury yield is 4.40%, and the 30-year yield is 4.94%. The spread between the two- and 10-year yields is 46 bps.

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