All Eyes on the Tariff Telenovela

Watching the latest twists and turns of the tariff decisions, positions and retaliations, I’m struck by a particularly sharp sense of déjà vu – not for a previous tariff conflict but for the golden age of telenovelas and soap operas. The moments when 83m Americans would be on the edge of their seat waiting to find out who shot JR in the show Dallas, 32m would hear the wrong name said at Ross’s wedding in Friends (although I will admit Friends was not technically a soap opera) while 30m ‘attended’ Luke and Laura’s wedding on General Hospital. This is not to say that the tariff wars are exciting and should be treated as entertainment. Rather that in a world of individualized For You Page bubbles and algorithmic feeds, these monoculture moments where so many people are focused on the question what comes next are both significant and increasingly rare. Of course, I’m not sure we want to see what comes next when it comes to tariffs…

Last week saw the S&P 500 and the NASDAQ each hit new record highs, only to ease by the end of the week on more tariff threats. I was actually very surprised we didn’t see more in the way of a negative reaction to tariffs given the resurgence in threats of tariffs on Eurozone goods, Mexican goods, Brazilian goods, Japanese goods and copper, among others. Yes, the tariff telenovela is back – and with a vengeance.

Don’t be so sure of the stock market safety net

The relative indifference of investors to tariff plot twists and turns speaks to what I believe is a misplaced complacency – that the US administration will not do anything to cause a stock market sell-off.

Let’s take last week. Several dramatic tariff threats were made, but there really was little negative impact on stocks. Of all the tariff threats made, I was most concerned with the suggestion of a 50% tariff on Brazilian goods and expected a bigger market reaction. That’s because the rationale was bizarre and completely unrelated to trade or even foreign relations – the prosecution of a former president. This tariff threat should make everyone nervous because it takes the tariff wars to a higher level of unpredictability; any rationale could potentially be used, including an entirely domestic matter, to levy an enormous tariff.

Maybe investors are right and the US will continue to avoid a stock market sell-off by pushing out deadlines and ultimately backing down. However, I think there is certainly a good chance the US does not – which could be very problematic for stocks. But even pushing out the deadline for tariffs will not be good for the US economy, in my opinion. The lack of certitude around what the tariffs will ultimately be creates significant uncertainty, which we know has historically had a chilling effect on business investment and hiring. I think we are already seeing signs of the current tariff wars’ impact in increased continuing jobless claims and lower consumer confidence (see more of these ‘sickly canaries’ here). For example, US-based employers have announced more job cuts in the second quarter of 2025 than in any of the previous second quarters since 2020.

Now, I have encountered those who are excited about the revenue to US coffers already being generated by the tariffs – keep in mind 30% tariffs are currently being applied to Chinese goods. However, we have to recognize that much of that cost is most likely being borne by US business and US consumers. And, as I have said before, I believe it will cause an elevation in prices that should soon show up in the data – price increases that could disproportionately affect lower income households. For what it’s worth, the Cleveland Fed Inflation Nowcast is forecasting core CPI at 3.05% y/y for July and core PCE at 2.72% y/y and any increase in inflation could give Chair Powell another reason to hold off on rate cuts.

I think it’s worth noting that last week, the US Chamber of Commerce and the Consumer Technology Association filed an amicus brief advocating for the rejection of President Trump’s use of the International Emergency Economic Powers Act (IEEPA) to impose global tariffs. This brief presents arguments that tariffs may negatively impact the US economy, particularly small business.

But the tariff wars aren’t just about the US. In the UK, GDP fell 0.1% m/m in May, which was below expectations and follows a contraction of 0.3% m/m in May. This weakness is likely related to the tariff wars because purchases were frontloaded in the first quarter and are now depressed. On the positive side, this increases the likelihood of a rate cut in August at a time when the Fed and other central banks are in ‘wait and see’ mode.

On a related note the Bank of England Financial Stability Report was released last week. The BoE believes risks to financial markets remains high for several reasons - geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt.

Speaking of pressures on sovereign debt, we are also still dealing with the aftermath of the passage of the OBBBA and the reality of a significantly larger deficit. In my view, this was the main driver for the higher yields seen last week when the 10-year US Treasury yield rose 7 basis points on the week, while the 30-year touched 5%. In my opinion, this is only the beginning of rates on the long end moving higher.

We saw something similar in Japan, where the passage of a $250 billion (39 trillion yen) fiscal stimulus package last week, which is intended to support consumption and create a sense of “wellbeing” among Japanese people, especially in the face of potentially high US tariffs on Japanese goods, has triggered increased concerns about fiscal sustainability in Japan and has pushed yields higher. Just today we have seen significant spikes in the 40-year, 30-year and 20-year JGB yields with the 20-year yield actually reaching its highest level since 2000.

This comes as we are seeing froth in a variety of places, from US tech stocks (especially the Magnificent 7) to bitcoin. All this tells me that we need to be very vigilant. Stocks with high valuations are particularly vulnerable to disappointment and those sources can come from a variety of places - earnings, tariffs and/or higher yields could trigger a very meaningful sell-off.

Looking ahead

Looking ahead, I will be very focused on earnings. As I’ve said, we have seen second quarter earnings expectations undergo significant downward revisions since the start of the quarter. Much of the reporting this week will come from the big banks, which are likely to meet or exceed expectations. I’m particularly interested to hear what they have to say about the health of the consumer, and their general outlook going forward. In addition, we will get the Federal Reserve Beige Book, which often provides very valuable anecdotal information on the health of the US economy and the sentiment of business owners. I will also be interested to see Eurozone sentiment now that there has been time to digest the monumental news that Germany has removed its debt brake on defense spending. We will also get substantial data on the Chinese economy, including retail sales, which will be important to assess given the fiscal stimulus underway there. And of course, US CPI will be important as we watch for signs tariffs are impacting prices.

The Week Ahead

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