No Endless Summer – markets continue to behave…for now

Another month, another deadline. No matter your view, the time taken to negotiate trade deals has accelerated drastically; urgency the forcing mechanism. Much as the style is not popular, it is hard to ignore that the approach, whilst blunt, is creating change. History will tell to what degree it has been a success.

Macro

Some of the key trading partners and global drivers of growth remain in limbo as we look to August 1 as the final, final deadline. To be seen whether this is adhered to but there is certainly a theme of concession from many. It would be nice to kick the tail end of the year off with the world knowing where it stands. In the interim, a significant proportion of Chinese exports have been diverted away from the US into the UK and EU. This goes against the appetite by the current US administration to lower rates and thereby further stimulate the economy, whilst simultaneously throwing inflationary concern to the curb. Data released Tuesday, which was a mixed bag, had the market price out a cut for the next meet at the end of this month. For those looking to demystify and understand in one clean number the impact of taxes should we not see material change, look no further than the US effective tariff rate. Prior to this administration the figure sat at just 2.5% versus 16.6% should no further negotiations come to fruition.

Risk

Results are starting to come in…how are we looking? Well, following the first full quarter of tariff -generated volatility, chances are we see greater divergence between banks who benefit from price movements and the opportunity to make wider spreads in less certain markets versus corporates who need certainty to both hire and invest… Thus far some of the behemoths of the industry have done well. JP Morgan has once again beaten expectations that to some may have felt lofty. Trading of both equities and fixed income corroborate that the dealing room outperformed in this environment. Additional return was driven by both actual and forecasted net interest income. Advisory and investment banking revenue also rose implying that whilst shock changes to global trade had stopped many in their tracks, appetite to do deals has returned. Sadly there were also signs though that inflation has not peaked, with CEO Jamie Dimon citing expenses as a headwind to greater outperformance for 2025. Wells Fargo, Citi, Blackrock, and BNY all saw upside surprises in their earnings per share this week. The names to watch that may well signal the top of the market (should you be looking for it) continue to be in the tech sector, where share performance has remained strong and earnings multiples high (implying continued expectation of strong outperformance). This is of particular relevance when thinking about the performance of US indices as a whole given the concentration and dominance of just a handful of names. Watch this space…

Credit

Faith in the ability to repay remains strong. Believe it or not, we find ourselves with the smallest risk premium for high-grade borrowers (or cheapest borrowing rates for the creditworthy) in the last five years. For now the good news is if you are seeking leverage, it’s a great time to be in the market. Taking advantage might make good sense all things considered. Whilst I would love to believe prices are fair and true, I do remain skeptical as to the (meagre) reward here for lending into an environment that still feels due additional volatility and potential correction with all that is going on. According to syndication professionals (bankers arranging bond deals), there has been a significant push to wrap transactions up earlier in the day whilst the benchmark US treasury curve remains liquid. It is fair to say the afternoon shift in Wall Street sees less buying and selling, at least of financial instruments. Others have commented that the market is racing to be “done” given the potential for adverse news risk, well, any time at all. It’s become so aggressive that an age-old practice of getting feedback from would-be investors to gauge appetite prior to selling is being skipped. Doesn’t really sound like an environment supportive of cheap money to me…

EUR

The ECB has been rather committed to cutting as we find ourselves at just 2.00% and half the 4.00% which came to an end as recently as last June. With inflation at an enviable 2% and roughly on target, the ECB has managed at least in headline and in aggregate brought prices down. The challenge remains that with 27 members there is likely to be some dispersion, with added complications coming from 7 not using the Euro. From those in though, the range is almost 4%, with France close to zero and Estonia through 4% as at the last inflation prints of the respective countries. Either way, given this aggressive easing and signs of economic life reemerging, Europe is close to the bottom of the cycle. Both the expected path of future rates, and President Lagarde agree unequivocally on this. Why is this important? Well, diverging rates versus the EU and trading partners lead to changes in currency which then impact on the value of both imports…and exports. A more expensive euro makes it yet harder to sell internationally. Anyway…

GBP

June saw no change to the base rate, but the next meeting could not be more different. Odds of the 25 basis point cut are sitting at a rather “safe” 95%. The UK is certainly behind on easing when compared to the EU. Over the next 12 months we could well be in the mid-3’s, down from 4.25 as of this week. Interestingly, the Bank of England has expressed concern with high household savings rates. Whilst not intuitive, additional data collected by the Bank indicates sentiment and expectation of a weakening labour market is impacting on spending habits, and therefore nest eggs being kept warm for potentially rainy days. The most recent growth data was not rosy, with a further contraction of -0.1% in May after -0.3% in April. When popping the hood, activity in manufacturing and construction were the main drivers. A very different picture now to Q1 of 2025 where growth on an annualized basis sat at 0.70%. Up. Perhaps the certainty the UK now has regarding a fresh US trade deal will inspire investment and hiring. Really too soon to tell.

USD

Whilst cuts have come and Musk has gone, the net result is more debt. With the passing of the big, beautiful bill, the States is looking to strap on an additional $3.4 trillion in borrowing. What does this actually mean though? Well, in the mid-1980s this was the sum total of all government borrowings. An additional benefit at the time is that this sat at just 40% of gross domestic production (think of it as a crude measure of the ability to repay). Fast forward to today and prior to all this borrowing being in the system, the US is just shy of 125%...and clearly growing. With Italy in the 1930s, where the similarities end is credit ratings, with the European nation just about holding onto investment grade status in the BBB range, many notches from the AA territory enjoyed by the US. The threat though is further US repricing, a slowdown and deterioration of ability to repay, which in turn leads to downgrades…and most importantly, higher borrowing costs. Something to be avoided if at all possible. With immigration enforcement high on the agenda, a decline in the labour participation rate will add measurable increases in, well, everything that involves a worker. Cuts to social security and accompanied by tax cuts for some is quite the concoction. As already highlighted, June CPI (consumer price index, or favoured measure of inflation) rose 0.3% in June from May and once again put some distance between the 2% target. Market reaction was clear and in one direction…rates are expected to be higher for longer. As it stands a cut at the end of the month is all but entirely off the cards, with odds roughly in favour (for now of a 54% chance) of 0.25% lower in September. Interestingly, much like the UK, easing is set to continue for now with a whole 1% likely still to be shaved off in the next 12 months.

So what?

Having completed the first full quarter since Liberation Day, it will be interesting to see how the real economy is performing over the weeks to come. Whilst banks have fared well, conditions have been favourable for much of their businesses. Divergence in rates across countries continues to offer opportunities for those seeking to take advantage whilst rates are still high, whilst the bottom of the cycle may prove to be attractive for those able to lend for longer in what should see the return to being a steepening curve. Credit remains cheap, everything else expensive. One thing is for certain…both in markets and in life, it will not be an endless summer. 

*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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