US – Powell vs Data
Last week, the Fed left interest rates unchanged, as widely expected. The tone during the press conference was clearly hawkish. Markets reacted by lowering the probability of a September rate cut to 40% from 60%, and rates sold off. However, everything changed suddenly last Friday, with a significant downward revision to previous Non-Farm Payroll data. Rates markets rebounded strongly, with the 2s10s curve steepening by almost 10 basis points, spreads widening, and the front end now pricing in an 80% probability of a cut in September.
The divergence between Powell’s rhetoric and the data presents an interesting scenario. If the softening labour trend continues the Fed may have little choice but to pivot dovishly. A September cut is now the base case. With real yields still elevated and growth risks rising, rates trades look increasingly interesting. In this environment, we favour duration expressions over risk assets, which may struggle if growth decelerates faster than expected.
Tariffs – 10% is the new 0%
Last Friday, President Trump unveiled a new trade tariff structure, hitting Switzerland particularly hard—raising tariffs from 31% to 39%—while Canada’s tariffs jumped from 25% to 35%. China remains in negotiation limbo, and no new clarity has emerged regarding the EU, Japan, or South Korea. Southeast Asian nations like Thailand and Malaysia face 19% tariffs.
While markets shrugged off the news, the risk of a further breakdown in global trade cooperation remains elevated. These tariffs may act as a stealth tax, gradually tightening financial conditions and weighing on corporate margins. For the U.S., the near-term fiscal boost is positive, but structurally, this raises stagflationary risks.
August – All about activity
August will bring a fresh wave of key macroeconomic data likely to steer markets—especially in Europe. PMIs, inflation, and GDP figures across the US, UK, and Eurozone will be closely watched for signs of economic momentum—or a lack thereof.
Markets will be closely watching the Bank of England’s policy decision on August 7, followed by the critical U.S. CPI release on August 12. The macro backdrop remains delicate. Any downside surprise in inflation or growth could trigger renewed rate-cut momentum—particularly in Europe where monetary policy is finely balanced. Stronger U.S. CPI or wage growth could reset expectations for Fed policy. We see asymmetric risks tilted toward weaker data.
Algebris Investments’ Global Credit Team
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