SIFs Little Changed Amid Tariff Letters

STOCK INDEX FUTURES

Stock index futures are little changed in overnight trade as markets await further news on the trade front and as new data shows weekly initial jobless claims came in lower than expected.

Stocks edged higher on Wednesday, shaking off several tariff letters sent out by the White House, while chipmaker Nvidia became the first company to ever hit a market cap of $4 trillion. Markets appear to be remaining calm and carry a cautious optimism in the wake of the tariff letters. Investors are betting on the fact that the tariff letters are serving as a means to increase pressure on other countries to get deals done quickly.

President Trump said on Wednesday his administration will charge Brazil a 50% tariff on products sent to the US starting August 1. Trump cited the country’s treatment of former President Jair Bolsonaro, who is on trial in Brazil’s Supreme Court on charges that he plotted a coup in 2022. This came on the heels of several other tariff announcements against several other countries, including Brunei, Moldova, Algeria, Iraq, the Philippines, and Libya. Those tariffs ranged from 20% to 30%. President Trump reiterated a 10% tariff on countries that align themselves with the BRICS group, of which Brazil is central in. India has reportedly made its final trade offer with a deal in President Trump’s hands. Signals around India this week have suggested that progress has been made towards a deal, although no official announcements have been made.

President Trump also announced a 50% tariff on copper imports into the US and a 200% tariff on pharmaceutical tariffs to reporters during a cabinet meeting on Tuesday. Trump suggested there would be a grace period of about a year for drug companies to move manufacturing to the US before they face steep tariffs. Pharmaceutical stocks dipped following the news but remained in positive territory. Trump also said he would announce tariffs on semiconductors, though he did not specify a rate or date.

The prolonged trade talks have extended uncertainty for businesses in the US, resulting in businesses holding back investment decisions in the US. Fed meeting minutes confirm this, as board members reported that business contacts had indicated that firms were continuing ahead with existing investment projects but that heightened uncertainty was making them cautious about beginning new projects. The new extension has offered some optimism that President Trump may be flexible towards some trade deals as time progresses. The effective tariff rate, calculated with the first round of letters, would be around 17.6%, the highest level since 1934.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve following the release of weekly initial jobless claims data, which showed 227,000 new claims vs. an expected 236,000 and down from last week’s revised figure of 232,000.

Futures finished higher across the curve Wednesday, supported by robust demand at the 10-year note auction. The note fetched a yield of 4.362%, below what traders were expecting. Primary dealers, who are required to bid at auctions, took up 10.9% of the auction, below the 12.1% average. The auction had an above-average 2.61 bid-to-cover ratio compared to a six-auction average cover of 2.58 ($2.61 in bids for every $1 of bonds). Attention now turns to the $22 billion in 30-year bonds that will be auctioned on Thursday. Recent comments by Treasury Secretary Scott Bessent indicate that he does not plan to increase the auction sizes of the longer-dated debt at current interest rates, which could provide support for longer-term debt prices. That will leave the Treasury more dependent on short-term Treasury bill issuance to finance its operations. The Treasury is expected to ramp up net T-bill issuance in order to replenish its cash balance closer to $850 billion by the end of the quarter. Concerns over a worsening budget deficit are viewed as largely priced in for now.

Meeting minutes from the FOMC’s meeting in June showed that only a couple of members of the board would be open to considering an interest rate cut at the July meeting, data dependent. Unsurprisingly, the entirety of the board viewed it as appropriate to leave rates unchanged at the June meeting. The minutes also showed that the board was still uncertain as to the level and lasting impacts of tariffs effect on inflation, although it was certain that increased tariffs were likely to put pressure on prices. Longer-term inflation expectations continued to be well anchored. The board still expects there to be two 25 bps rate cuts both this year and next year.

President Trump reiterated pressure of Fed Chair Powell for sharp interest rate cuts. The president said the fed funds rate is at least three points too high. President Trump is also continuing his search for a new Fed chairman and has indicated the wants someone aligned with his views on monetary policy. Likely candidates could be Scott Bessent, Kevin Warsh, and Kevin Hasset.

The 10-year Treasury yield is 4.35%, and the 30-year yield is 4.87%. The spread between the two- and 10-year yields is 51 bps.

CURRENCY FUTURES

The USD index is little changed in overnight trade. The USD index edged higher Wednesday, hitting a two-week high against the yen as President Trump announced more tariffs against other countries. The IMF reported that the US dollar’s share of global currency reserves fell to 57.7% in the first quarter of 2025, down from 57.8% at the end of 2024. Minutes from the Fed’s June meeting showed that the downwardly revised US economic outlook led foreign investors to hedge their currency risk, adding pressure on the dollar. The Fed did note that foreign investors are still holding onto US investments and there has been no sign of a major pullback and that the sensitivity of the foreign exchange value of the dollar to domestic economic surprises had not changed.

Euro futures slipped in overnight trade as German CPI figures showed no change in inflation in the country. Euro futures were lower Wednesday as investors cautiously weighed the likelihood that the EU would not receive a tariff letter and get a trade deal done with the US that could potentially secure some exemptions on certain goods. The EU said it was working on reaching a deal with the US by the end of the month. There are reports that the US had proposed a deal to the EU maintaining a 10% baseline tariff, with exemptions for key sectors such as aircraft and spirits. The IMF reported that the share of euros in global currency reserves rose from 19.8% in 2024 to 20.1% in the first quarter of 2025, the highest level since 2022. Markets now expect only one additional rate cut from the ECB this year. ECB officials have signaled that rates will likely be held steady at this month’s meeting following eight consecutive cuts since June 2024. With inflation aligning with the 2% target, policymakers are taking a cautious stance amid persistent global trade tensions and the euro’s recent appreciation.

British pound futures are lower, facing continued pressure from growing concerns over the UK’s fiscal outlook as the UK seeks to finalize a deal with the US to eliminate tariffs on British steel. Chancellor Rachel Reeves hinted at possible tax hikes in the autumn budget to address a public finance gap. The Office for Budget Responsibility (OBR) has projected that public debt could surpass 270% of GDP by the early 2070s, driven by the financial strain of an aging population and escalating healthcare and pension expenditures. Additionally, increasing global tensions and growing demands for higher defense spending are contributing to long-term fiscal uncertainty. UK monthly GDP data is set to be released on Friday. Industrial production data for May is also due to be published on Friday, as well as UK trade balance data. UK inflation remains sticky. Core inflation has shown little movement over the past year, causing concern among BoE officials and complicating rate cut decisions. UK money markets are pricing in a 66% chance of a rate cut in August.

Japanese yen futures are lower, continuing a slide following President Trump’s decision to place a 25% tariff on Japanese goods effective on August 1. Export-dependent Japan stands out among major US trading partners as being the farthest from a deal, while the yen has continued to slide. Multiple rounds of talks have failed to result in a breakthrough, and Japanese policymakers are increasingly focused on a critical upcoming election. Speculation that opposition parties will gain seats in Japan’s upper house and push for more fiscal stimulus has sent Japanese government bonds lower this week, causing a spike in long-term yields and further pressure on the yen. Japan is unlikely to sign a trade deal with the US unless it includes a big cut to tariffs on autos and agriculture. Automobiles account for nearly 30% of Japan’s US-bound exports and are central to employment and industrial output. On Friday, the Bank of Japan is set to conduct outright purchases across four segments of the Japanese Government Bond yield curve, including JGBs with maturities of more than five years up to 10 years and those exceeding 25 years. These purchases are expected to help support the domestic bond market.

Australian dollar futures are higher, as the surge in copper prices boosted demand for the commodity-linked currency. As one of the world’s top copper exporters, Australia stands to benefit, with higher prices supporting the Aussie due to its strong commodity ties. The Reserve Bank of Australia held rates steady in a surprise move, leaving the benchmark interest rate at 3.85%. The RBA said it wanted to wait for more data on inflation to confirm that it remained on track to reach 2.5%. The on-hold decision follows earlier reductions in May and February and comes as core inflation has fallen back to around the top of the RBA’s 2% to 3% target band after a multiyear effort to restrain growth in prices. The RBA also said it remained cautious about the economic outlook regarding aggregate demand and supply in the country. Interest-rate reductions are widely expected to continue through the remaining months of 2025, with most economists expecting the benchmark rate to end the year closer to 3.0%.

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