15% is the new 10%
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Market update
The S&P 500 closed the week at 6,388.64, +1.46% higher. The Dow Jones closed at 44,901.92, +1.26%, with the Nasdaq higher by +1.02%. The volatility index VIX closed the week at 14.93, down from 16.41. The Euro Stoxx 600 rose +0.54%.
The 10-year UST closed at 4.39%, down from 4.42% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 3bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 80bps and High Yield spreads narrowed -8bps at 329bps. German 10-year Bunds yield closed at 2.72% up from 2.69% a week before. In Europe, Corporate Investment Grade spreads narrowed -3bps at 92bps and High Yield narrowed -12bps at 309bps.
The US Dollar Index (DXY) depreciated -0.85% last week and closed at 97.65. The Euro closed at 1.1742 (+1.00%); the Yen appreciated +0.75%, closing at 147.69 and the Swiss Franc appreciated +0.74%, closing at 0.7954. Gold closed at $3,337.3, depreciating -0.38%. Oil was lower, Brent closed at $68.44 (-1.21%) and WTI at $65.16 (-3.24%).
Macroeconomy
Tariffs
The US and EU concluded a trade agreement which mirrors the structure of the recent US-Japan deal. The agreement includes a 15% tariff on autos, excludes pharmaceuticals, and maintains the existing 50% tariffs on steel and aluminum. In a significant gesture, the EU has pledged to import $750 billion worth of energy, invest $600 billion into the US economy, and purchase “vast quantities” of military equipment. Additionally, the EU has committed to opening its markets to US goods at zero tariffs. On pharma there was some confusion as to whether the EU will be exempt from the upcoming Section 232 investigation on the sector. For now, there is mixed commentary on this from both sides. Last week, Japan reached a trade deal with the US ahead of the August 1 tariff deadline. The deal includes a 15% tariff, including automobiles and parts. In a post, Trump also said that “Japan will invest, at my direction, $550 Billion Dollars into the United States, which will receive 90% of the Profits”. Other agreements last week included the Philippines (19%) and Indonesia (19%). Meanwhile, US-China negotiations are underway in Stockholm today and tomorrow. Although their bespoke August 12th deadline looms, early reports from Chinese press headlines, suggest a 90-day extension has been granted. This week, the Federal Appeals Court will hear the International Trade Court’s ruling that President Trump’s use of an emergency declaration to impose tariffs was unlawful. The potential impact of this is doubtful.
FOMC
The Federal Reserve is expected to meet on Wednesday. The key question is whether enough uncertainty has lifted for the Fed to signal a clearer policy direction for September. Markets expect the Fed to hold rates steady for a fifth consecutive meeting, maintaining its current guidance without offering new clues about September. Notably, analysts anticipate two governors will dissent (it has not happened since 1993) at a time when political pressure on Chair Powell is intensifying. Also meeting this week are the Bank of Canada (Wednesday) and the Bank of Japan (Thursday), both expected to keep rates unchanged.
ECB
The European Central Bank (ECB) left rates unchanged for the first time in a year. The reference rate stayed at 2%, as expected. However, several aspects leant in a more hawkish direction. The statement kept their options open with the ECB “not pre-committing to a particular rate path.”, while Lagarde said that they were “in a good place now to hold and to watch how these risks develop over the course of the next few months.” Moreover, Lagarde did not rule out the possibility of the next move being a hike when asked. Later in the session, there was a Bloomberg article which said that those pushing for another cut “face an uphill battle”, and that another hold “looks like the baseline for September”. So that fit into the message from the press conference.
PMIs
In the US, the headline flash PMI for July was strong, coming in at 54.6 (up from 52.9 in June and above the consensus estimate of 52.8), but details were mixed, with robust services performance (55.2 vs. 52.9 in June and vs. the 53 forecast) offset in part by weakness in manufacturing (the manufacturing flash dropped to 49.5 vs. 52.9 in June and vs. the 52.7 forecast). Meanwhile, in addition to the manufacturing pressure, inflation remains quite elevated: “tariffs were also again widely linked to steeper cost inflation, which was increasingly passed through to customers. The resulting rate of inflation for prices charged for goods and services was among the largest seen over the past three years”. In Europe, the Euro Area composite PMI rose to an 11-month high of 51.0 (vs. 50.7 expected), so it added to the sense that the European economy had held up after Liberation Day. In Asia, he S&P Global Japan services PMI rose to 53.5 in July from 51.7 in June, driven by growth in new business. Conversely, the manufacturing PMI fell to 48.8 in July from June's final reading of 50.1, that had marked the first time in 13 months that the index had exceeded 50.0. This month's fall obviously covered the period before the trade deal was announced. When combining both service and manufacturing activities, the composite PMI remained steady at 51.5, indicating four consecutive months of expansion. In Australia, the S&P Global composite PMI increased to 53.6 in July, up from 51.6 previously, reaching its highest level since April 2022 and marking the tenth consecutive month of expansion. Furthermore, the services PMI rose to 53.8 in July from the previous reading of 51.8, achieving its fastest growth rate in 16 months. Meanwhile, the manufacturing PMI registered at 51.6 in July compared to 50.6 previously. New orders for manufactured goods have rebounded, resulting in the strongest overall growth in new business in over three years.
Highlights
On rates
In the US, the Treasury curve flattened on the back of trade optimism, resilient economic data and easing fears that Mr. Trump might dismiss Fed Chair Powell. The 2yr yield rose +5.4bps, ending the week at 3.92%, while the 10yr yield closed at 4.93%, -2.8bps lower. This marked the steepest flattening of the 2s10s curve since February. Fed expectations held steady, with the market pricings in 45bps of incremental rate cuts. Fed Fund Futures indicate a 97% probability of rates remaining on hold at this week’s FOMC meeting, and a 63% chance of a cut in September. In Europe, the ECB held rates steady for the first time this year as ECB President Christine Lagarde struck a surprisingly hawkish tone. Rate cut expectations moved in a hawkish direction, with only 16bps of easing now priced in for the remainder of 2025 (down -8.1bps from a week ago). That came as ECB’s François Villeroy de Galhau stated the bank should “remain completely open on future decisions,” and highlighted the euro’s rise, noting its “significant disinflationary effects.” Yields on 2yr bunds rose +7.8bps, while yields on 10yr bunds rose +3bps, closing at 2.72%.
Earnings
Earnings season is ramping up, with over 60% of S&P 500 companies set to report by the end of this week. Currently, over 30% have reported, and 80% have exceeded EPS expectations by more than 6%. Sales results are also coming in strong, with 80% of companies outperforming expectations by more than 2%. The weakened dollar and significant analyst downward revisions before the season have facilitated these strong positive results. The earnings revision ratio (percentage of upgrades relative to downgrades) started the quarter strong and is projected to increase before tapering off mid-quarter. The spotlight this week will be on Microsoft and Meta (Wednesday), followed by Apple and Amazon (Thursday)—together representing 20% of the S&P 500. In Europe, earnings and sales results have been disappointing. Around one quarter of the Stoxx Europe 600 companies have already reported. Over half of companies missed expectations, and averages are below historical standards. Europe's earnings revision ratio is at its lowest in four years and remains low compared to the US. A strong euro may lead to continued downward revisions in earnings forecasts. Major releases in Europe include L’Oréal, AstraZeneca, Spotify, Hermes, Airbus, Safran, and Schneider Electric.
What to watch
- Monday: HK Exports; US Dallas Fed Manufacturing Activity
- Tuesday: ECB CPI Expectations; US JOLTS, Conference Board Consumer Confidence
- Wednesday: Australia CPI; Singapore MAS July 2025 Policy Statement; Eurozone Q2 GDP; Bank of Canada Rate Decision; US FOMC, ADP Employment, Q2 GDP
- Thursday: BOJ Policy Meeting, Japan Retail Sales; China PMI; Taiwan & HK Q2 GDP; Eurozone Unemployment Rate; Canada May GDP; US PCE Price Index, Personal Income and Spending, Initial Jobless Claims
- Friday: Manufacturing PMI for Asia; Korea July Exports; Japan Jobless Rate; Eurozone July CPI; US Nonfarm Payrolls, Hourly Earnings, ISM, University of Michigan Sentiment