Holding the status quo: Markets, tariffs, and the turning point ahead

As we sit squarely between bank holidays in the UK and US, there is plenty to digest before the return to normality following vacation seasons across the Northern Hemisphere. There has been lots of noise around conflicts and tariffs. For now at least we are in a holding pattern. The one certainty is that things will change, the only question is…when?

Macro

A quick summary here of where we got to on tariffs, which for now, seems both relevant and helpful to cut through all the noise. The White House’s final tariff list set a baseline 10–15 % duty on imports: Canada faces 35 %, Japan, the EU and South Korea 15 %, the UK 10 %, Vietnam, Indonesia, Pakistan and the Philippines 19–20 %, Brazil 50 %, India 25 %, and Switzerland 39 %. Mexico received a 90‑day reprieve. The average effective tariff is expected to reach -20 %, the highest U.S. rate in a century. Brazil and India have resisted and negotiations continue. China remains in play, with a truce to November 10. (State of U.S. Tariffs: August 7, 2025 | The Budget Lab at Yale). Plenty of unhappy folks listed that are undoubtedly going to need to make concessions to get to a place that does not cause the implosion of demand from what remains to be the most important economy in the world, generating more than 25% of global output.

Risk

Q2 reporting is all but done. Now 90% through all the S&P, a whopping 81% surprised by the upside on both revenue and earnings per share. Looks like those lofty highs continue to be  justified, at least in the short term, as reality has exceeded expectations. Several trends came through, being lower input costs, reigning in expenses, and a more active consumer.  Tricky to believe we see a repeat of this over the coming months with all that is happening out there. Forward guidance (for Q3) corroborates this view, with 38 of the index issuing negative guidance whilst 40 are feeling chipper. (FactSet Earnings Insight). Banks had a great quarter, led by higher for longer interest rates (and that net interest margin) as well as volatility-induced trading opportunities stemming from political and tariff-related uncertainty. Dealmaking, a lucrative source of additional revenue for the sector, has also been up. Europe is a somewhat different picture: corporate earnings expected to turn negative, revenue dropping 1.5% for Q2. (https://www.reuters.com/business/european-second-quarter-corporate-profit-outlook-dips-2025-08-19/) There have been some big year to date winners out there though. The main indices of Spain (+30%), Italy (+24%), and Germany (+21%) outperformed strongly versus high single-digit returns on average in developed markets. Despite all the negative sentiment around the UK and its traditional/tech-lite constituents, holders are up a respectable 13% since the beginning of the year. The stats improve for USD investors, with GBP strength leading to a 22% gain.

Credit

The primary bond market has had its busiest week since June. To be fair, not that hard of a record to beat! Good news that funding markets are once again open and printing business. The investment grade spread continued to narrow and by the beginning of August reached 0.79% (above US treasuries) flirting heavily with the all-time low of 1998 (being 0.77%) and well inside the post-Liberation Day blowout to 1.22%. (Bond investors warm to risk, with Fed staying put in 'Goldilocks' economy | Reuters). Risk of this reversing is likely to come from increased supply and/or headline-driven negative shocks. Generally speaking, we think it has been a typical summer market with issuance for the month minuscule and demand to borrow being matched by the willingness to provide liquidity at these tights (and perhaps whilst outright rates remain higher). 

EUR

The latest decision by the ECB on July 24 saw no change. Additionally, language and macroeconomic conditions imply we may well be at the very bottom of the cycle, with less than one cut currently priced in over the next 12 months. (Bloomberg) At 2%, money certainly seems cheap enough, especially when coupled with tight credit spreads. Thinking about refinancing? I think it might not be a terrible time to pull that trigger… Economic activity has accelerated to its highest in over a year, according to the latest manufacturing data (Euro zone business activity accelerates in August as new orders grow, PMI shows | Reuters). This also represented the first expansion in over three years. Something seems to be working! One important outlier has been the performance of the economic powerhouse that is Germany. GDP quarter-on-quarter not only contracted to -0.3% but came in a slice worse than the expectation of a shallower -0.1% estimated by experts. (Germany’s GDP contraction worse than expected after tariff boost | Euronews). Despite the cuts and low outright interest rates, the Eurozone, unlike its American and UK cousins, continues to enjoy on-target inflation at 2.0% for July. Stability in services and food was offset by a slight lift in energy costs. As we move into the winter months, this may well be the part of the basket that tips the scales. As is tradition, and continues to challenge the concept of a single currency, country-level inflation ranged from 6.6% in Romania to 0.1% in Cyprus. (Annual inflation stable at 2.0% in the euro area - Euro indicators - Eurostat). 

GBP

Inflation for July was considerably less well-behaved in the UK across the board. Both headline and core were up to 3.8%, almost double the target rate of 2%. Some relief comes from the significant contribution made by airfares over the peak holiday season (up a rather impolite 30.2%, dread to think how much larger this number might be when looking at seat and storage shrinkage). Seasonality should be our friend here. Services, the continued bane of the Bank of England's existence, and not a terrible proxy for wages, exceeded the already lofty 4.8%, printing at 5%. (United Kingdom Inflation Rate). Not really the environment where you might expect the central bank to be cutting, but that is exactly what happened on August 8. Calls for an additional cut before the year is out have been pared back from 80% immediately following the decision to less than 40% at the time of writing. Last week we saw the latest GDP print and it was an outperformance: 0.3% expansion versus the 0.1% prediction helped pull bets of further easing. The Autumn budget remains a known unknown, where speculation is rife that tax hikes can and must come. A tricky spot for the government being high inflation, low growth, a cooling labour market, and a rather stretched balance sheet. Still far from an IMF bailout, but also far from ideal.

USD

Jackson Hole has been and gone. The market expected a more positive tone from Fed Chairman Powell, who cited downside risks particularly in the labour market where there is a measurable slowdown in both the supply and demand for labour. Tariffs and immigration policy are not making the job of predicting where to price money any easier, given these inputs are likely to continue to be inflationary, in more ways than one, with increased political pressure adding to an already thankless task. The ousting of one of its voting members Tuesday did not help and further diminished autonomy. As for the minutes from the last meeting, where the Fed held rates, it was apparent that voting members see the risk of inflation outstripping any possible need to stimulate a slowdown that has not fully materialised. Delinquencies have been rising, not only on credit cards and autos but also on student loans. Higher for longer is not helping. The inflationary impact to date of existing tariff increases is not great, estimated at approximately 1.8%, or $2,400 for the average household. That's a lot of hotdogs, and fewer than there used to be. (Source)
With Powell under pressure, it is worth a quick moment considering who and what a replacement might look like. Federal Reserve Bank of Dallas President Lorie Logan has been rising in prominence. Interesting to all of us in money markets, is her statement made this week that we should prepare ourselves for a potential funding spike over quarterend, citing a smaller Fed balance sheet and less capacity for banks to facilitate the important accounting date. The days of emergency actions are now gone with various tools at the market's disposal but it is nonetheless interesting and impactful given the narrow scope of what is deemed eligible collateral…could be an interesting ball drop this time around. S&P reaffirmed the US’s AA+ / A1+ credit rating. Interestingly, revenue generation from tariffs was cited as meaningful and positive for balancing books and a counterbalance to both tax and spending cuts. Um…ok…

So what?

Plenty of moving parts as we come into the final sprint of the year. Whilst it’s always a challenge to predict the future, the ability to do so in the current environment continues to feel more challenging than it has been for many years. Whether we see escalation or de-escalation is still to be seen in those areas of conflict. Whilst much of the US tariff noise is over, at least for now, new trading partnerships will continue to be formed, altering once again and further the shape of the global economy where we are likely to see an increase not just in regional partnerships but the joining of new dots. Whilst it’s not necessarily a bad thing, it is certain that there is plenty to be prudent about. As always, know where your risks lie, and where the exit is. As it’s important to make sure that a door opens when it needs to!

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.

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