Trump and the EU Dodge a Trade War The U.S. President gets his beloved 15% tariff but little else from Europe.

The WSJ Editorial Board:

The U.S. and Europe stepped back from the brink of a trade war Sunday, as the two sides announced a deal that avoids tit-for-tat escalation that could do larger damage to both economies.

President Trump and European Commission president Ursula von der Leyen announced the deal as a major event, but that’s true only as a relief. Mr. Trump had threatened a 30% tariff on European Union goods, while Europe had armed for a retaliatory strike on U.S. aircraft, cars, poultry, steel and much more. Europe also could have fired a bigger bazooka that included limits on U.S. investment and a big tax on U.S. companies operating on the continent.

The U.S. will impose a 15% across-the-board tariff on European imports, up from 10% today and less than 5% on average in January. This means Europe will get a partial reprieve from Mr. Trump’s 25% auto tariff, though reports say the 50% border tax on European steel and aluminum exports will continue.

Mr. Trump is trumpeting the EU’s commitment to buy some $750 billion in U.S. energy, invest $600 billion in America, and buy U.S. weapons. Much of this would have happened anyway. European countries have been signing long-term contracts with U.S. liquefied natural gas producers as they wean themselves off Russian energy.

Europe is already the largest foreign investor in the U.S., with European direct investment increasing by roughly $200 billion from 2023 to 2024. Three times that over an undefined period is hardly a great coup. By the way, those investment inflows will increase the U.S. trade deficit because of balance-of-payments accounting. Sorry, Mr. President.

European defense spending is also set to increase as Russia gets aggressive and leaders realize they need to rearm. Buying F-35 jets has been a centerpiece of Germany’s rearmament since Russia invaded Ukraine in February 2022.

Alas, the deal doesn’t appear to address America’s biggest commercial grievances with Europe, such as digital taxes, punitive regulation against U.S. tech firms, and such faux food-safety rules as GMO restrictions and bans on hormone-treated U.S. beef. Nor does it require Europeans to pay more for drugs, one of Mr. Trump’s longstanding complaints.

Mr. Trump seems to have abandoned these goals in favor of his beloved tariff, which is a tax increase on American consumers and businesses, including for pharmaceutical imports and ingredients. Making Americans pay more for drugs via the tariff is an odd way to punish Europe for its price controls that let it free ride on American drug innovation.

Europe may figure that it’s better off paying a 15% blanket tariff that avoids steeper sectoral duties, and U.S. courts are likely to strike down Mr. Trump’s on-his-own-whim tariffs in any case. The U.S. Court of Appeals for the Federal Circuit will hear arguments Thursday on the International Emergency Economic Powers Act, or IEEPA, that Mr. Trump is using to justify his worldwide tariffs.

As Mr. Trump pulls back from the worst of his trade threats, his supporters are pulling what amounts to a rhetorical and political bait and switch. Because there hasn’t been a recession or a global tariff spiral, they say his trade policy is a great success. No Great Depression II, the critics must have been wrong.

Bloomberg’s columnist Lionel Laurent:

(…) Yet it’s hard to fully reconcile the we-dodged-a-bullet rhetoric with the reality that Europe’s 27-country single market faces a real hit. The combination of a 15% tariff rate and the euro’s 13% rise against the US dollar year-to-date represents a competitiveness double-whammy with little in return. The details are lacking and it’s unclear if this really is the end of hostilities. While US tariffs are expected to curb euro zone GDP by around 0.4%, that could rise to 0.7% if more surprises are to come, warns Bloomberg Economics.

Considering EU officials claimed to be ready in a worst-case scenario from possible retaliation against US tech firms like Amazon.com Inc. to teaming up with other vulnerable trade targets like Canada, it’s curious that so much has been given up for so little. Trump also claimed the EU is promising to buy $750 billion in US energy, invest $600 billion in the US and buy “vast” amounts of US weapons — a reminder of the continent’s dependence on American security that has only helped the Trump administration wring concessions on trade and tax. A few months ago, German Chancellor Friedrich Merz called for a more “independent” Europe; today, the Italian left calls this deal “unconditional surrender.” (…)

Of course, tariffs cut both ways. The US consumer will, all things being equal, suffer as protectionist levies are passed on and the global economy suffers a $2 trillion hit that saps investment. A lot now depends on the strategies of multinationals and industries; some will choose to absorb the tariff impact themselves, others will try to keep negotiating with the promise of new factories to come. One of LVMH’s tariff-mitigation strategies is a new plant in Texas — following one it opened in 2019. A lot also depends on just how expansive the part of the deal promising zero-tariff goods turns out to be. (…)

Cracks widen in Japan and US’s interpretation of tariff trade deal Tokyo officials contest Washington’s claim that American investors assured of vast share of profits from joint investment

(…) “The Japanese will finance the project. We will give it to an operator and the profits will be split 90 per cent to the taxpayers and 10 per cent to the Japanese. They basically bought down their tariff rate by this commitment,” said Lutnick.

On Thursday, Trump said the $550bn was a “signing bonus” to the US. “What Japan did is they brought down their tariffs,” Trump told reporters. “They gave us $550bn upfront, 100 per cent. We get 90 per cent, they get 10 per cent.”

But a slideshow issued by Japan’s Cabinet Office on Friday appeared to contradict Lutnick by saying the ratio of profit distribution would be “based on the degree of contribution and risk taken by each party”.

(…) Akazawa has been clear that Japan will provide “up to” $550bn in investment, financing and loan guarantees, rather than framing the number as a target or commitment.

“There is nothing inspiring about the deal,” said Mireya Solís, senior fellow at Brookings Institution. “Both sides made promises that we can’t be sure will be kept . . . there are no guarantees on what the actual level of investments from Japan will be.”

Some of the $550bn of investments could involve the US government owning the assets and undertaking large capital investments with funding backed by both nations and affiliated institutions, according to Japanese and US officials. The assets would then be leased to the private sector for operating.

One US official said details of the scheme were still being worked out. (…)

Political analysts said that on balance Japan appeared to have walked away with a good deal at little cost, setting an example that could become a model for other large exporters such as Germany and South Korea.

“Japan has been playing a card game with Trump and the reality is Trump has a better hand with more jokers that he can play,” said David Boling, Asian trade director at Eurasia Group. “They ended the card game in a good position.”

Trump’s Tariffs Are Already Stunting World Growth While Markets Shrug

(…) The hit to the world economy will reach $2 trillion by the end of 2027 relative to its pre-trade war path, Bloomberg Economics projects. Looking further ahead, some of those losses would be recouped as production and supply chains realign.

“It’s becoming clear that President Trump’s tariff negotiations are bad for investment,” perhaps especially so in the US, says Daniel Harenberg, lead economist with Oxford Economics. “In the end, tariffs may not be as high as feared. Still, they are essentially a tax that puts sand in the wheels of supply chains and global trade.” (…)

It’s true that Wall Street economists have nudged their forecasts for the US a little higher in recent months, and dialed back recession warnings that peaked amid the market turmoil in April. But the consensus is still for a slowdown rather than a takeoff. (…)

To look through the swings in trade and inventories, some analysts focus on a category known as inflation-adjusted final sales to domestic purchasers. It grew at a 1.9% rate in the first quarter, down from 2.9% in the final three months of 2024. The Atlanta Fed’s GDPNow forecast, which draws on multiple official data releases to create a real-time proxy for growth figures, now predicts that reading will slow further to around 1% in the second quarter. (…)

Weak data on construction spending and equipment purchases that feed into the Atlanta Fed’s GDPNow model have left it predicting a contribution of just 0.1% to economic growth in the second quarter from non-residential investment. That amounts to a stalling out. (…)

Trump’s decision to tariff tomatoes from Mexico has hit NatureSweet’s production there. Inputs it needs for cultivating the plants in Arizona — from Sri Lankan coconut husks to Chilean fertilizer — are all subject to new taxes, too. And going ahead with the expansion will require importing greenhouse and irrigation systems from places like the Netherlands and Israel.

“My main competitors in Canada are getting no tariffs,” says Rodolfo Spielman, NatureSweet’s president and CEO. “So the current situation is the worst possible situation for us.” (…)

In every member of the G-7 group of advanced economies, forecasts for business investment next year are lower now than they were when Trump took office, Bloomberg surveys show. (…)

Wolfgang Niedermark, a member of the Executive Board of the Federation of German Industries, said on Sunday that “even a tariff rate of 15% will have an immense negative impact on Germany’s export-oriented industry.”

Similar worries abound in Japan, even though it sealed a deal for 15% tariffs on all exports — including autos — to the US, its biggest market. (…)

That points to another feature of the trade war: While much of the worry in the US is now focused on higher prices, the tariffs are a drag on growth in the US and almost everywhere else. That’s bad news for China, the biggest US adversary, where growth prospects and deflation are already problems.

The Chinese economy grew 5.2% in the second quarter of this year, despite slowing exports to the US, but it’s clear the impact hasn’t been fully digested. A Bloomberg Economics analysis found that only five of 33 industrial sectors accounting for just 2.4% of China’s GDP can absorb the current tariffs and remain profitable. (…)

John Authers:

(…) The deal isn’t a trade treaty — such things cannot be thrashed out in a 45-minute meeting at the golf course. It’s barely even about trade. And the EU gets nothing from it. To use a phrase from Tigress Financial Partners’ Jean Ergas, it’s more the extraction of reparations from Europe for perceived past wrongs.

And yet, it’s market-friendly, because the US had threatened to levy a tariff of 30% on EU imports from Friday. In possibly the biggest victory for Trump, stock markets have brushed off the excitement to set all-time highs.

The deals with Japan and the EU (and others in recent days) follow massive concessions to the administration by the media group Paramount and Columbia University. The classic Hulk tactics have worked, and opponents have been picked off one by one. Despite game theory to the contrary (which Points of Return covered back in April), bullying has paid off. Game theorists show that bullies can be beaten if the victims stand together, and take some pain — the bully will hurt more than they do. The rest of the world seemed ready for this a few months ago. US trading partners from China to Canada and through to the EU immediately threatened retaliation. But now they’re caving one after another.

How has this happened? Facts have helped. To date, tariffs have produced a lot of revenue for Washington without clear negative effects on inflation or US profits. The dollar, contrary to expectation, has weakened, making US goods more competitive and failing to counteract tariffs. That strengthened Trump’s hand and made him more credible. Beyond that, the bully has convinced people he means business with renewed and escalating threats, and his targets haven’t coordinated their defense. (…)

The biggest gainers were Japan’s automakers — a strange outcome as the 15% tariffs are meant to defend the US car industry from the likes of Toyota Motor Corp. and Honda Motor Co. Japan can now send cars to the US bearing only 15% tariffs, while Ford Motor Co. or General Motors Co. must pay tariffs on all imported components, including 50% on steel; so it’s not clear this dents Japanese cars’ competitiveness. (…)

These are not detailed and carefully negotiated treaties, and may not survive for long. But some clarity on what the tariffs will be for at least a few months, and the knowledge that countries are chickening out of a damaging fight with the bully, are good for now and allow a focus on positive things like artificial intelligence.

Whether this is a secular bull market will depend on how the economy and markets digest the mixture of fiscal juice, much higher tariffs and mostly lower interest rates that they have been prescribed. Trump has won his bout via two submissions. It will be months before we know whether the economy delivers a fall or a knockout.

• EU faces backlash from France and Germany over US trade deal

Ruchir Sharma, chair of Rockefeller International in the FT:

(…) The bigger mystery is why the stagflationary impact of tariffs has yet to materialise in the aggregate data. Is the US really enjoying a free lunch, taking in $300bn a year in tariff revenues with none of the expected heartburn? By some estimates, foreign exporters are indeed absorbing 20 per cent of the costs — a much larger share than they did in response to tariffs in Trump’s first term. The remaining 80 per cent, however, is still getting paid in roughly equal shares by US corporations and consumers.

The likely answer is that the negative economic effect of tariffs is being countered by other forces, including the mania for artificial intelligence and more government stimulus. Since January, estimates of what the big tech companies will spend this year on building out AI infrastructure have risen $60bn to $350bn. Smaller businesses are scrambling to catch the wave too, further boosting growth. (…)

Meanwhile, the promise of tax relief makes it easier for US corporations to absorb a larger than expected share of the tariff costs, rather than pass it all on to consumers. Trump’s “big, beautiful bill” is expected to save US businesses around $100bn this year and more than that in 2026, mainly in tax breaks. (…)

Donald Trump freezes export controls to secure trade deal with China US officials have been warned to avoid tough moves against Beijing as Stockholm hosts third round of negotiations

(…) The commerce department’s Bureau of Industry and Security, which runs export controls, has been told in recent months to avoid tough moves on China, according to eight people, including current and former US officials.

US and Chinese officials will meet in Stockholm on Monday for a third round of trade talks following previous meetings in Geneva and London. (…)

Jimmy Goodrich, a senior adviser to Rand for technology analysis, said chips are measured by power and memory bandwidth and that the H20 “excels at memory bandwidth beyond any current domestic Chinese chip” that was critical for the large-scale development of AI.

“The H20 is the gasoline fuelling China’s AI engine,” he added.

Beyond the H20 debate, US security officials and experts are frustrated that the Trump administration is holding back actions on China.

“Trump has now effectively frozen US export controls and given away the H20 semiconductor for nothing, undermining one of our most critical national security tools,” said one former official. (…)

The spokesperson said Trump had imposed export licence requirements for the H20 and would consider applications “carefully, accounting for both the benefits and the costs of potential exports from America”.

Nvidia said the Trump administration had “full visibility and authority over every H20 transaction”. Several people familiar with the situation said the Trump administration had yet to issue any H20 export licences.

Underlying Demand for Durable Goods Weakens in June

Aircraft-related volatility continued to whipsaw overall durable goods data for June. As expected, the surge in orders for nondefense aircraft in May was met with a sizable pullback in June, which pulled overall orders for new durables down 9.3% during the month. For a cleaner read of underlying demand conditions we exclude the transportation sector, which shows orders were up 0.2% last month.

Yet despite that better outturn, underlying orders activity was still rather weak.

Core capital goods orders, which excludes defense spending and aircraft specifically, fell 0.7% in June, and although that came with a slight upward revision to May’s data, it signals a slowdown amid the monthly volatility seen throughout the first half of the year.

When it comes to growth implications, it is the shipments data that feed into the Bureau of Economic Analysis’ GDP estimate. Nondefense capital goods shipments (including aircraft) slipped 0.9% in June, suggesting a much slower pace of equipment spending in Q2 than the north of 20% annualized rate at which it picked up in the first quarter. We’ll get the first look at Q2 GDP growth next [this] week, where we look for a pickup in growth that likely says more about an unwinding of tariff-induced behavioral changes in Q1 than a strong underlying growth profile for the U.S. economy.

Businesses are ultimately given little incentive to make large capital expenditures in today’s environment. August 1 is the next date circled when it comes to potential changes to tariff policy, and the fluid nature of these policies has left many firms in limbo or paralyzed on if and when they should make large equipment outlays. (…)

Core capital goods orders slipped at a 1.7% average annualized pace over the past three months, the largest drop in a year. We’re still bracing for a softening in capital investment in the second half of the year amid increased costs, lower end demand and still-elevated borrowing costs.

Source: U.S. Department of Commerce and Wells Fargo Economics

US sees inflated new-vehicle sales in July

The seasonally-adjusted annualised rate (SAAR) for new-vehicle sales is expected to be 16.7 million units, the highest point in more than three years. This is up by around 700,000 units compared with July 2023. New-vehicle retail sales are expected to reach 1,135,300 units, a 5% increase year on year. (…)

“While the top-line sales results are impressive, they are being inflated by sales that would have otherwise occurred in June. The delay occurred because of the software outages in June that limited many dealers’ ability to process transactions, affecting the June sales pace,’ said Thomas King, president of the data and analytics division at J.D. Power. (…)

‘Manufacturer discounts are continuing to rise,’ King pointed out. ‘The average incentive spend per vehicle has grown 52.1% from July 2023 and is currently on track to reach $2,892. Expressed as a percentage of MSRP, incentive spending is currently at 5.9%, an increase of 1.9 percentage points (pp) from a year ago. Spending has increased by $197 per unit from June 2024.  (…)

(CalculatedRisk)

Trump floats the possibility of tariff rebate checks

President Trump on Friday suggested the government might consider issuing rebate checks to some Americans from the tariff revenue collected this year.

Rebates would return to consumers some of the higher prices they’ve paid as a result of those tariffs — but could also raise the specter of inflation, similar to previous rounds of government stimulus.

“We have so much money coming in, we’re thinking about a little rebate,” Trump told reporters outside the White House. “A little rebate for people of a certain income level might be very nice.”

The government collected more than $100 billion in tariff revenue in the first half of this year, per Treasury data, and is on track to collect more than $27 billion this month alone.

(…) there was talk of a DOGE savings stimulus earlier this year that went nowhere.

Americans are making increasing use of BNPL payments according to Bank of America debit and credit card retail spending data. The number of light users (1-4 payments per month, 63% of the total) is growing 13% YoY suggesting growing adoption. Extra heavy users (20+ payments per month) grew the most across all income groups in June, “suggesting BNPL adoption has likely become more mainstream as consumers, especially younger people, face rising cost pressures.”

The Chicago Fed’s National Activity Index is a monthly indicator designed to gauge overall economic activity. It is a composite of 85 monthly indicators across four broad categories. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend (average) rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth.

The index is not in contraction mode (-0.7) but is clearly in “below average growth” territory.

(Advisor Perspectives)

Job openings keep falling …

… although unemployment is not threatening so far:

But slowing wages suggest a slowing labor market:

The Indeed Wage Tracker measures wage growth by monitoring changes in the advertised pay found in job postings on Indeed. Other measures of wage growth — including the Bureau of Labor Statistics’ Employment Cost Index (ECI) and the Wage Growth Tracker published by the Federal Reserve Bank of Atlanta — track wages differently and focus on existing employees (instead of job postings), but have shown similar patterns in recent years, albeit at more muted levels.

As of June, annual growth in posted wages for high-paying jobs clocked in at an annual rate of 2.9%, while middle and low-paying jobs came in at 3% and 2.8%, respectively.  

In June, typically higher-paying jobs still accounted for every spot in the top five list of categories with the fastest growth since last year.

Much of the recent strength in posted wage growth has been concentrated in typically higher-paying roles, but that seems to have faded. Low- and middle-wage jobs have seen more modest pay gains at or below the pace of inflation, but are showing signs of stabilization.

Slowing job growth, slowing wages. Inflation?

EARNINGS WATCH

From LSEG IBES:

The Beat Goes On  

168 companies in the S&P 500 Index have reported earnings for Q2 2025. Of these companies, 79.8% reported earnings above analyst expectations and 14.3% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 6.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.3%.

Of these companies, 78.6% reported revenue above analyst expectations and 21.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 2.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 7.7%. If the energy sector is excluded, the growth rate improves to 9.5%.

The estimated revenue growth rate for the S&P 500 for 25Q2 is 4.5%. If the energy sector is excluded, the growth rate improves to 5.7%.

The estimated earnings growth rate for the S&P 500 for 25Q3 is 8.4%. If the energy sector is excluded, the growth rate improves to 9.1%.

Trailing EPS are now $254.97. Full year 2025e: $264.51. Forward EPS: $281.37e. Full year 2026e: $301.39.

We are thus entering the most volatile time of the year with strong earnings, upward revisions and most everybody dismissing much tariff impact on either the economy or profits.

Source:  Topdown Charts

Callum Thomas: “Seasonally speaking it’s the Aug-Oct period that tends to see the most volatile and worst returns for the year.”

Source:  Topdown Charts Professional

Right when the skew index, a measure of potential tail risk in the financial markets, has spiked near the high end of its historical range.

Some people are worried that “meme stocks are back, with GoPro, Opendoor and Krispy Kreme rallying double digits this week thanks to investor hype and Reddit threads” Axios’ Madison Mills reports.

Their resurgence is the latest signal that investors are willing to take on more risk, as stocks keep hitting record highs and it gets harder to beat the broader market.

Data: Financial Modeling Prep; Chart: Axios Visuals

JP Morgan: “The latest bout of extreme crowding, currently in the 100th percentile, is in high-beta stocks. This spans both riskier low-value and speculative growth plays. It is also the fastest pace in 30-years.”

Why care when profits are booming?

Well, tariff revenues are running at a $325B+ annual pace. That’s 1.0% of nominal GDP, 1.5% of disposable income and 7.5% of total pretax corporate profits. Where the hit?

Fiscal Dominance Will Rule the Federal Reserve

From my good friend Hubert Marleau:

Indeed, too much attention has been spent on the theatrics of whether Powell will be fired as Chair of the Federal Reserve, overlooking the deeper truth: that regardless of what may happen to him, the reality is that a fundamental overhaul is coming to the world’s most important central bank that its way beyond mere interest rate settings and building renovations. (…)

Thus the objective is about imposing a policy mix called “Fiscal Dominance,” a sort of a watershed moment that would subordinate the Federal Reserve to the priorities of the US Treasury and political aims. The thing is that the fiscal arithmetic is sufficiently dire, the political environment sufficiently febrile, the strong productivity sufficiently broad, and the promise of AI exceptionalism sufficiently credible for an era of fiscal dominance to become an existential threat to the Fed’s independence.

Kevin Warsh, a former Fed governor and Treasury Secretary Scott Bessent, two leading contenders to take over Powell’s job, are saying that there must be a close cooperation between the Fed and the Treasury. Howard Lutnick, Secretary of the Commerce Department, and Mike Johnson, House Speaker, are also supporters of the idea.

Kevin Warsh laid out the idea in a CNBC interview, essentially stating: “We need a new Treasury-Fed Accord, like we did in 1951 after another period where we built up our nation’s debt and we were stuck with a central bank that was working at cross-purposes with the Treasury. That’s the state of things now. So if we have a new accord, then the Fed chair and the Treasury secretary can describe the markets plainly and with deliberation. This is our objective for the size of the Fed’s balance sheet.”

Meanwhile, Scott Bessent said on CNBC: “What we need to do is examine the entire Federal Reserve institution and whether they have been successful because its autonomy is threatened by persistent mandate creep into areas beyond its core mission, provoking justifiable criticism that unnecessarily casts a cloud over the Fed’s valuable independence on monetary policy, wondering what the Fed’s legions of Ph.D. economists are doing.’

As a result, there is serious talk in Washington to install Scott Bessent as Treasury secretary and Fed Chair, either at the same time or as a board member – a return to the original system where the Treasury had a seat on the board of the central bank.

Howard Lutnick, in an interview with Sean Hannity on Fox News, called out for Jerome Powell to be removed, by hook or by crook. He said: “This guy gotta go. He should be replaced, we need lower interest rates”: while Mike Johnson, became the latest member of Trump’s inner circle to assail Jerome Powell, thinking that all scrutiny is appropriate in support of modifying the laws which delineate the Fed’s purpose and role in the US economy.

While I believe the market would not refuse the inclusion of non-elite school economists to join the Fed’s staff and experienced business CEOs to sit on the Fed’s board, I’m certain that they would not favour a Fed that would become the piggy bank for the Treasury system. On the contrary, the Fed should be fenced in from political winds.

Decades of research has proven that market economies need independent central banks to counterbalance inflationary pressure, often emanating from the ambitious goals of governments. Put simply, conservative monetary theory dictates that within the broad guardrails of price stability and maximum employment given by the government, central banks should be given substantial freedom to control the variability and expectation of inflation.

FYI

From Bruce Melhman:

• The party holding the White House has lost seats in the House of Representatives in 18 of the past 20 midterm elections (90%). American voters have always been suspicious of concentrated government power and have consistently sought balance over time. 9 of the past 11 elections were change elections with the party in the White House losing the House, Senate and/or Presidency. Advantage Democrats in 2026.

• It may be “the economy stupid” for Presidential elections, but no economic indicator (consumer confidence, inflation, stock market returns) correlates consistently to midterm outcomes. What does correlate (high R²)? Presidential Approval. Midterms are referendums on the party in power, usually narrowing the mandate given at the last election. And absent >60% approval, the President’s party loses seats. Trump is currently at 44.6% approval. Advantage Democrats.

• One reason the “out” (of the White House) party consistently gains ground in House midterms is comparative partisan motivation — the enthusiasm gap. Out-party voters are highly motivated to vote to fight back against the party in control, while in-party voters are complacent or disappointed that they have not gotten everything they expected (e.g. Epstein files per Steve Bannon). This week’s CNN poll shows 72% of Dem/lean Dem voters “extremely motivated” to vote in next year’s election vs 50% of Republican / lean-Republicans. Advantage Democrats.

• “The Democratic Party’s image has eroded to its lowest point in more than three decades, with voters seeing Republicans as better at handling most issues that decide elections. The new survey finds that 63% of voters hold an unfavorable view of the Democratic Party—the highest share in Journal polls dating to 1990 and 30% higher than the 33% who hold a favorable view.” Advantage GOP.

• Musk / 3rd parties. World’s richest man Elon Musk says he will launch and fund a new “America Party,” aiming to get candidates on the ballot in multiple swing seats and states. Of course Musk says a lot of things. It’s very hard to get third parties on the ballot, and even harder for them to win. Since 1945, third party candidates have only won 6 Senate seats (out of ~1,500 races held) and ZERO House seats (out of the more than ~8,000 House races including third party candidates).

US Flash PMI: Growth accelerates in July as rising demand for services offsets manufacturing dip

The headline S&P Global US PMI Composite Output Index rose sharply from 52.9 in June to 54.6 in July, according to the ‘flash’ reading (based on about 85% of usual survey responses). The latest reading signalled the fastest rate of growth recorded so far this year, with output having now increased continually for 30 months.

July’s expansion was powered by the services economy, where business activity rose at a rate not seen since last December. Although manufacturing output also rose, up for a second successive month, the rate of production growth moderated to signal only a modest expansion.

New orders growth also accelerated to match the pace seen back in May, albeit with an improvement in new business inflows into the service sector being offset by the first (albeit marginal) drop in factory orders recorded so far this year. In both cases, total new orders were adversely impacted by a fall in exports, which collectively fell for the third time in the past four months and at the sharpest rate since April.

While service providers saw improved domestic demand from both households and businesses, the renewed drop in demand in the manufacturing sector was often attributed to tariffs, higher prices and heightened economic uncertainty.

The deteriorating manufacturing picture was also linked to inventory control. Having built up their inventories of both raw materials and finished goods in May and June, often attributed to factories and their customers seeking to front-run tariffs, manufacturers reported lower stock holdings in both cases during July. Purchasing of inputs likewise rose at a sharply reduced rate amid reduced reports of the need to front-run potential tariff hikes on imported goods. Supplier deliveries quickened as a result of the reduced pressure on supply chains.

Price pressures intensified across both manufacturing and service sectors during July, widely blamed on higher goods prices due to tariffs but also in some cases due to rising labor costs. Average prices charged for goods and services rose at a rate just shy of May’s recent high to register the second-strongest monthly increase since September 2022.

Services price inflation accelerated to register the second-steepest increase since April 2023 and, although factory gate selling price inflation eased, the rise in charges for manufactured goods was the second largest since November 2022.

Input cost inflation also picked up again, having eased slightly in June, registering the second-steepest rise since January 2023. The rate of input cost inflation remained especially sharp in manufacturing, despite cooling compared to June’s post-pandemic peak, and accelerated in services.

Close to two-thirds of all manufacturers reporting higher input costs attributed these to tariffs, whilst just under half of respondents explicitly linked their increased selling prices to tariffs. However, the tariff impact was by no means limited to factories, as around 40% of service providers reporting higher selling prices explicitly mentioned tariffs.

Employment rose for a fifth straight month as companies took on additional staff in response to rising backlogs of work. Uncompleted orders rose at a pace not witnessed since May 2022.

However, these trends varied markedly by sector. Backlogs rose at the steepest rate for over three years in the services economy as firms struggled to meet demand, despite reporting the largest gain in payroll numbers since January. In contrast, manufacturing backlogs fell, causing a drop in factory payrolls for the first time in three months.

Companies’ expectations about output in the year ahead fell for a second successive month in July, dropping further below the survey’s long-run average amid declines in both manufacturing and service sector confidence. Although optimists continued to outnumber pessimists, sentiment in July was the lowest recorded for just over two-and-a-half years bar only April’s recent nadir.

Reduced optimism again primarily reflected broad-based concerns over tariffs and cuts to state funding following recent federal government policy changes. Even in manufacturing, any protectionist benefits of import tariffs were often outweighed by concerns over higher prices and rising costs.

The S&P Global Flash US Manufacturing PMI fell to 49.5 in July, down from June’s 37-month high, signaling a renewed deterioration of factory business conditions for the first time since December.

Production growth slowed as new orders placed at factories fell for the first time this year. Both employment and inventories of purchases also dropped for the first times since April. Supplier delivery times meanwhile quickened for the first time since September last year, improving to the greatest extent for 17 months in a sign of less-busy supply chains (and hence also pulling the PMI lower).

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The flash PMI data indicated that the US economy grew at a sharply increased rate at the start of the third quarter, consistent with the economy expanding at a 2.3% annualized rate. That represents a marked improvement on the 1.3% rate signalled by the survey for the second quarter.

“Whether this growth can be sustained is by no means assured. Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running.

“Business confidence about the year ahead has also deteriorated in both manufacturing and services to one of the lowest levels seen over the past two-and-a-half years. Companies cite ongoing concerns over the impact of government policies, notably in terms of both tariffs and cuts to federal spending.

“Inflation pressures have meanwhile intensified. Companies most commonly attributed higher costs and selling prices to tariffs, though increased labour costs are also prevalent, in part reflecting labor shortages.

“The rise in selling prices for goods and services in July, which was one of the largest seen over the past three years, suggests that consumer price inflation will rise further above the Federal Reserve’s 2% target in the coming months as these price hikes feed through to households.”

 

Trump’s Tariffs Are Being Picked Up by Corporate America Neither consumers nor foreign countries are assuming much of the tariff burden. At least not yet.

The U.S. has collected an additional $55 billion in tariffs this year. Corporate America has largely shouldered the bill. (…)

It is becoming increasingly clear that U.S. businesses, from General Motors and Nike to the local florist, are absorbing much of the costs for now. In a competitive market, a company that hikes prices could lose market share to a rival that keeps its prices steady. Many are reluctant to raise prices until they absolutely must, and until they know the ever-changing tariffs are sticking around. In some cases companies have said they plan to raise prices in the months to come. (…)

Inflation has begun to tick up for some tariffed goods, including furniture, toys and clothes. So far those increases have been relatively mild. The June inflation reading moved to 2.7% from a year earlier, versus a 2.4% increase in May. The increase has been slower than expected partly because many companies pulled back on buying or stocked up on inventory before tariffs took effect, and partly because companies are choosing to absorb the hit for now. (…)

General Motors said this week it paid more than $1 billion in tariffs on automotive imports in the second quarter. The company hasn’t implemented wide-scale price increases in response to tariffs but hasn’t ruled out price hikes, Chief Executive Officer Mary Barra said Tuesday. Stellantis, the Netherlands-based parent of the U.S. brands Ram and Jeep, this week said tariffs on automotive imports cut $350 million from its bottom line.

Tariffs clipped the profit of RTX, the aerospace and defense company said. The toy maker Hasbro said Wednesday that the financial impact of tariffs was less than expected in the most recent quarter, but that some of the effects could still be coming. Tariffs will likely create a $60 million expense for the full fiscal year, the company said.

Toy prices are likely to go higher later this year, Hasbro Chief Executive Chris Cocks said. “Usually it takes five to eight months for a toy to go from the factory to the shelf,” he said. For now some retailers are delaying their purchases, and Hasbro is compensating for higher tariff costs through cost cuts, working with new suppliers, introducing new products and increasing prices, he said.

Last month, Nike executives said tariffs would trim the company’s profit by around $1 billion this fiscal year, with most of the hit in the first half, before their mitigation efforts can take effect. “Surgical” product price increase will flow to shelves later this year, said Matthew Friend, Nike’s chief financial officer.

Economists estimate the effective average tariff rate on all imported goods is now nearing 17%, up from 2.3% last year. (…)

Goldman Sachs conducted what it called a more granular analysis of import prices and concluded that foreign companies, particularly those in China, appear to be absorbing around 20% of tariff costs through price cuts. (…)

In May, Walmart said that it had started raising some product prices to offset the cost of tariffs and that more price increases would come this summer. (…)

Shayai Lucero, a florist near Albuquerque, N.M., is swallowing some of the extra cost of tariffs, while also raising prices. The imported long-stem roses from South America she buys from U.S. wholesalers used to cost $1.15 to $1.35 each but are now running $1.95 to $2.15 apiece. That has forced her to raise her price for a vase of a dozen roses to $69 from $60, she said.

The floral wreaths and foam she imports from China have also climbed in price since Trump added 30% tariffs on those imports. A heart-shaped wreath from China that used to cost $24 recently jumped to $38. That and higher flower prices cut the profit on an arrangement she recently made for a funeral to $6 from $30, she said.

She worries that higher prices could lead to lost business. “It’s that real fine line of do I lose customers or do I stay in business?” she said. (…)

Some footwear companies have announced plans to increase prices in the coming weeks, said Matt Priest, CEO of the Footwear Distributors and Retailers of America, a trade association.

“A lot of the impact has so far been absorbed by the brand and the retailer, but they can only hold on for so long,” Priest said of his member companies. About 99% of shoes sold in the U.S. are imported from China, Vietnam, Italy and other countries.

From my July 18 post:

Some import prices: last 3m a.r., June YoY (%)

• All imports excluding food and fuels: 3.3  1.0
• Industrial supplies & materials excluding fuels: 3.7  4.3
• Industrial supplies & materials, durable: 8.5  5.7
• Unfinished metals related to durable goods: 13.0  5.7
• Finished metals related to durable goods: 19.3  12.3
• Capital goods: 3.6  1.0
• Automotive vehicles, parts & engines: 0.8  0.9
• Nondurables, manufactured: 1.6  -1.2
• Durables, manufactured: 2.0  –0.1

The consumer side has been spared for the most part so far (last 3 lines) but there is acceleration. Industrial prices are exploding. Remember, import prices do not include tariffs.

The Harvard Business School Pricing Lab uses real-time online pricing data from four major U.S. retailers to track the prices of more than 300,000 products by country of origin.

The lab monitors goods from Canada, Mexico, China and those produced domestically.

It released a paper on July 17 covering data through July 15.

(…) Our data span from October 1, 2024 to July 15, 2025. (…)

The 2025 tariffs on Chinese goods first became binding on February 4, at a rate of 10%, but had little immediate effect on these retail prices. The situation changed on March 4—marked by a dashed vertical line in the figure—when the U.S. imposed 25% tariffs on imports from Canada and Mexico, along with an additional 10% tariff on Chinese goods. Immediately afterward, the prices of imported goods increased by approximately 1.2 percentage points, while domestic goods prices rose by roughly half as much.

After Liberation Day on April 2, the rate of price growth for imported goods quickly accelerated, coinciding with the announcement of a baseline 10% tariff on goods from all countries.
For Chinese goods, the tariff was raised to 125% on April 10 as trade tensions between the two countries escalated. Domestic goods prices also increased during this period, but at a significantly slower pace.

Prices responded again after May 12, when the US temporarily reduced additional tariffs on Chinese goods to 10% for a 90-day period. Following the announcement, there was a modest and short-lived decline in prices across all goods. However, by early June, both imported and domestic goods appeared to resume their prior trends.

While these results show relatively quick price responses to tariff announcements, the overall magnitude of these changes remains modest. Across the entire sample, the cumulative increase in imported goods prices since early March is approximately 3 percent. This increase is still small relative to the size of some of the announced tariff rates, particularly for Chinese goods.

These findings are consistent with patterns observed during the first round of U.S. trade tensions in 2018–2019.

(…) the price increases observed for domestic goods suggest that tariffs have broader effects beyond directly targeted imports. (…)

Many U.S.-made products rely on imported inputs—such as components, packaging, or raw materials—from tariffed countries. Even when final assembly occurs domestically, firms may raise prices to reflect rising input costs. In addition, as tariffs make imported goods more expensive, firms may anticipate a shift in demand toward domestic substitutes. Expecting this substitution, they may increase prices on U.S.-made goods, especially in categories where domestic and foreign products are close substitutes. (…)

After the ”Liberation Day” announcements on April 2, price trends between these countries began to diverge. Chinese prices continued to rise steadily in the weeks that followed, as the trade tensions escalated, with the US imposing tarrifs rates up to 125% on Chinese imports. Canadian prices increased in late April but soon declined again. Mexican goods saw a more distinct divergence, with prices dropping after April 2.

This divergence likely reflects a higher number of exemptions for Mexico and Canada—particularly for goods compliant with USMCA—and growing expectations of an imminent trade agreement with these countries. (…)

The [next] figure shows that in early March, prices of domestically produced goods in affected categories rose in parallel with those of imported goods. However, starting in April, the two trends began to diverge: import prices continued to increase—driven by tariff pass-through and ongoing supply-chain frictions—while domestic prices in the same affected categories grew at a lower pace. Following the announcement of the tariff pause with China on May 12, domestic prices in these categories fell temporarily.

By contrast, domestic goods in unaffected categories experienced a more gradual and steady price increase. This pattern may reflect uncertainty regarding which sectors or inputs might eventually be subject to tariffs. Firms in these categories may have responded more slowly, incrementally adjusting prices in anticipation of future tariffs or disruptions.

Alternatively, retailers might have raised prices more broadly to protect margins amid growing uncertainty or to preserve relative pricing structures across different product categories. (…)

Our analysis reveals that the announcement of U.S. tariffs prompted rapid but still relatively modest price adjustments, with the extent of these changes varying by product origin and category.

The most pronounced price increases occurred among imported goods, which have risen approximately 3 percent since early March. However, domestic products also saw some gains, likely driven by expectations of rising input costs and shifts in consumer demand.

Notably, we observe differences across countries: price increases for Chinese goods were both larger and more persistent than those for products from Canada and Mexico, where retailers may have viewed the tariffs as more temporary or less likely to be sustained. Importantly, price pressures extended beyond directly affected categories, with even unaffected sectors showing gradual increases—suggesting broader strategic pricing and supply chain spillovers.

These findings underscore the wide-ranging impact of trade policy, which can influence retail prices far beyond the specific goods targeted by tariffs.

• Volkswagen Cuts Guidance After $1.5 Billion Tariff Hit

(…) Net cash flow at its automotive division is now seen at between €1 billion and €3 billion from €2 billion to €5 billion previously (…). Volkswagen said the lower end of the forecast ranges assume the current U.S. import tariffs of 27.5% will continue to apply in the second half of 2025. The upper end assumes these tariffs will be reduced to 10%. (…)

“What really matters is cash in the bank,” Volkswagen Chief Financial Officer Arno Antlitz said in a statement. (…)

Tariffs are outgoing cash.

• Puma Plunges as New CEO Cuts Outlook on Weak Demand, Tariffs The company anticipates US tariffs to hurt gross profits this year by about €80 million.

  Year-to-date, 28% fewer Canadian residents have crossed the U.S. border by car than by this point in 2024.

Data: Statistics Canada. Chart: Axios Visuals

SENTIMENT WATCH

Independents Drive Trump’s Approval to 37% Second-Term Low

Six months into his second term, President Donald Trump’s job approval rating has dipped to 37%, the lowest of this term and just slightly higher than his all-time worst rating of 34% at the end of his first term. Trump’s rating has fallen 10 percentage points among U.S. adults since he began his second term in January, including a 17-point decline among independents, to 29%, matching his lowest rating with that group in either of his terms.

For their part, Republicans’ ratings have remained generally steady near 90% and Democrats have been consistently in the low single digits.

These latest findings are from a July 7-21, 2025, Gallup poll, which began days after Trump signed into law the One Big Beautiful Bill Act on July 4. The law addresses many of Trump’s second-term priorities, including tax cuts for individuals and corporations and increased spending for border security, defense and energy production. It also cuts funding for healthcare and nutrition programs such as Medicaid and the Supplemental Nutrition Assistance Program to offset some of the costs of the tax cuts and spending increases.

Trump closes out the second quarter of his second term in office having accomplished much of what he said he would do if elected. Yet, outside of his Republican base, relatively few Americans are pleased with his performance. His rating has fallen to the lowest point of his second term, essentially matching where he was at the same time in his first term, which is not much higher than his all-time worst rating. He also gets generally poor marks for handling key issues, including immigration and the economy, which were major focuses of his campaign.

“No more than 36% of independents approve of the president’s job performance” on any of the eight issues Gallup polled: (Axios)

• The situation with Iran (36%).
• Foreign affairs (33%).
• Immigration (30%).
• The economy (29%).
• Foreign trade (27%).
• Israel (27%).
• The situation in Ukraine (24%).
• The federal budget (19%).

Data: Gallup. Chart: Axios Visuals

Five-Cent Meme Stock Makes Up 15% of Trading on US Exchanges

Shares of tiny Healthcare Triangle Inc. stood out as the most actively-traded name on US exchanges on Thursday, another example of how investor exuberance is fueling wild gyrations throughout the equity market.

The little-known healthcare information technology company saw its stock price more than double to just above five cents, with over 3 billion shares changing hands. That was equivalent to about 15% of the total shares traded on US exchanges for the day, data compiled by Bloomberg show.

After surging 138% at the open, Healthcare Triangle’s shares closed up 115%, with no apparent news to spark the eye-popping move.

The total value of shares traded for the day stood at approximately $150 million, nearly seven times the company’s market capitalization.

The surge was among the latest manifestations of the meme stock mania that has sparked rallies in speculative names, with Kohl’s Corp., GoProInc. and Krispy Kreme Inc. among the list of companies whose shares have seen big moves. Shares of Opendoor Technologies, which shot higher on Monday, were also notable for massive trading volumes.

China’s Unitree Offers a Humanoid Robot for Under $6,000

Unitree Robotics is marketing one of the world’s first humanoid robots for under $6,000, drastically reducing the entry price for what’s expected to grow into a whole wave of versatile AI machines for the workplace and home.

The startup, among the frontrunners in Chinese robotics, on Friday announced its R1 bot with a starting price of 39,900 yuan (or $5,900). The machine weighs just 25kg and has 26 joints, the company said in a video posted to WeChat. It’s equipped with multimodal artificial intelligence that includes voice and image recognition.

The four-figure price tag highlights the ambitions of a new generation of startups trying to leapfrog the US in a groundbreaking technology. Unitree rose to prominence in February after CEO Wang Xingxing joined big names like Alibaba Group Holding Ltd.’s Jack Ma and Tencent Holdings Ltd.’s Pony Ma at a widely publicized summit with Chinese President Xi Jinping.

The new robot’s launch coincides with China’s biggest AI forum, set to kick off this weekend with star founders, Beijing officials and AI-hungry venture investors converging in Shanghai. The World Artificial Intelligence Conference will bring together many of the key figures expected to drive China’s efforts around AI, which is finding a physical expression in the rapid development of more humanoid robots.

After decades of dominance by American companies like Boston Dynamics, Chinese companies are pushing ahead with humanoids for factories, households and even military use. Pricing is crucial to their proliferation. (…)

Rival UBTech Robotics Corp. said recently that it planned a $20,000 humanoid robot that can serve as a household companion this year, seeking to expand beyond factories.

If it works as advertised, Unitree’s new robot would mark a milestone for the robotics industry, particularly when it comes to complex humanoids. Morgan Stanley Research estimates that the cost of the most-sophisticated humanoid in 2024 was around $200,000.