July 2025
Liberation Day, the April 2nd date on which President Trump unilaterally imposed across-the-board tariffs on all trading partners of the United States created several dislocations in the economy and the capital markets. Initially, it prompted importers to buy inventory in advance of the tariffs, causing a huge spike in the monthly trade deficit prior to that imposition. As expected, in the months that followed the deficit contracted when buyers, swelled with inventory, paused their buying.
In the days following, profit worries caused the S&P 500 to swoon, with the index falling to 4,835, a more than 20% fall from the high price touched just weeks earlier.
Bond traders, anticipating a weakening economy, steepened the yield curve by pushing the 2-year note lower while simultaneously pushing the 30-year bond higher, fearful that the Fed would be unable to contain tariff-related inflation. Market participants falsely believed that they had correctly anticipated what was to come in terms of corporate earnings and economic growth.
While private surveys continued to reflect consumer worry that the tariffs would impact consumption, the hard data did not deteriorate. Most notable employment continued to stay relatively strong, and the various measures of inflation remained tame. With that, investor bullishness returned pushing the indices ever higher as spring turned to summer, ultimately touching a new high on the last day of July.
The Federal Open Market Committee, at their July meeting acknowledged the benign inflation environment but communicated that they were not prepared to cut the overnight rate despite two voters, Chris Waller and Michelle Bowman dissenting. It was the first time there were two dissents since the Greenspan-led Fed back in 1993. That decision was immediately criticized by Trump and two days after the decision the July employment report portrayed the economy in a different light.
For July, the BLS reported that 73,000 new jobs were created, below the 104,000 expected and more than half of what was originally reported last month. But the previous two months’ results were revised lower by -258,000 jobs; an unmitigated disaster! That report turned up the volume on Trump’s criticism of Powell and his calls for an immediate cut in the overnight rate. Decades ago, such immediate action was commonplace but given the standard procedure of the current Fed there is no chance of that happening. However, the likelihood of a cut at the September meeting has skyrocketed, especially since San Francisco Fed President Mary Daly and Minneapolis Fed President Kashkari have both hinted that they believe the time for a rate cut has come. While both participate in the monetary policy discussion, neither is a voter, so it’s not guaranteed that there will be a third and fourth dissent come September. However, given the clear slowdown in hiring, we think a rate cut at the September 17th meeting is a very likely outcome.
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