Tariffs are Officially Here

STOCK INDEX FUTURES

Stock index futures are higher as President Trump’s tariffs went into effect a minute past midnight on Thursday. Trump also announced a 100% tariff on semiconductors at a press conference where it was also announced that Apple would make a $100 billion investment in the US and build some products in the US. Jobless claims ticked higher to 226,000 new claims for the week ending August 2, while the previous figure was revised up from 218,000 to 219,000.

Productivity figures rebounded in the second quarter, growing 2.4%, well above the first quarter’s -1.8% drop.

The indexes ended higher on Wednesday, powered by a sharp gain from Apple as the announcement of a new $100 billion investment in domestic manufacturing was applauded by investors. Apple will also largely be spared from President Trump’s 50% tariff on Indian goods. A White House official confirmed Wednesday that Apple’s semiconductor-powered devices, which include its iPhone, will be unaffected by Trump’s 25% “reciprocal” tariffs set to go into effect Thursday. The same goes for an upcoming promise of an additional 25% levy related to India’s use of Russian oil that is set to be in place in about 3 weeks’ time.

The question in the economy now that tariff levels are mostly set, and that tax cuts are on the horizon is how will economic growth and the labor market recover. Tariffs are likely to put increased pressure on prices, while reduced immigration and government job cuts have the dynamic to weigh on demand. Final sales to consumers and businesses, which carves out government spending, inventories, and international trade, grew just 1.2%, the weakest since late 2022, per data on Wednesday. Additionally, a challenge remains in October, when tens of thousands of federal employees who took voluntary buyouts will be off the government’s payrolls and potentially unemployed.

CURRENCY FUTURES

The USD index fell in the overnight session, hitting a 10-day low as tariffs take effect and markets anticipate more interest rate cuts. Reciprocal US tariffs came into force against dozens of countries a minute past midnight Washington time on Thursday. The dollar fell on Wednesday as the euro hit a one-week high Wednesday as markets increased bets that the Fed will cut rates more times than previously expected following the worrying labor report last Friday. With little economic data on the calendar this week, markets continue to hone in on the implications of Friday’s report, which signaled a sharp deterioration in labor market conditions.

Euro futures are lower, pressured by newly implemented tariffs and data that showed Germany’s goods exports to the US slid in June, while industrial production also unexpectedly took a strong hit. Exports from Europe’s largest economy to the U.S. slid 2.1% to 11.8 billion euros ($13.76 billion), the third consecutive monthly decrease and the lowest value since February 2022. Imports from the US increased, narrowing the trade surplus with the US. Industrial production weakened a more-than-expected 1.9% in June, with output in the second quarter of the year dropping to the lowest level since the first half of 2020. Downward revisions to previous months’ data showed that production took a hit from tariffs, just as data published on Wednesday showed that German manufacturing orders also declined in June. The hit to these sectors is attributed to the impact of US tariff policy, although they could see some relief from the reduction in US tariffs on cars, agreed to in the EU-US trade deal.

British pound futures are higher, gaining support from signals that the Bank of England will not cut rates again soon. The BoE cut interest rates by 25 bps to 4.00%; while five of the nine MPC members backed a 25 bps cut, four voted for no change. Governor Andrew Bailey called it a “finely balanced” decision and reiterated that future cuts will be “gradual and careful.” It was the first time in the BoE’s history that two votes were needed to reach a majority on rates. The split in voting highlights the differing opinions on rising inflation in the country, which is expected to hit 4% in September, as signs of labor market strain continue to appear in the economy. Purchasing Managers’ Index data for July showed British businesses were raising prices at a “robust pace,” while the Halifax House Price Index rose 0.4% in July, more than the expected 0.1%. Growth forecasts for 2025 were nudged up to 1.25%. The BoE also flagged potential changes to its bond sales program next month, citing stress in long-dated gilt markets. Markets expect one more cut this year.

Japanese yen futures are lower amid confusion over the US-Japan trade agreement. The US announced this morning that it would “add” a 15% tariff on all Japanese imports, not the 15% tariff rate Japan had believed the US would impose on Japanese cars and many other imports. Japan’s top trade negotiator is in Washington looking for clarification on the trade deal. Today’s 30-year bond auction went smoothly with solid bidding. The bid-to-cover ratio was 3.43, down from 3.58 at last month’s auction but better than the six-auction average of 3.30. Real wages in Japan fell for the sixth straight month in June, with inflation continuing to outpace pay growth, a trend that complicates the Bank of Japan’s path toward further policy tightening. The data cast doubt on the near-term outlook for rate hikes, especially as the BoJ contends with sluggish wage momentum, persistent inflation, and ongoing global trade uncertainty. Minutes of its June policy meeting showed a few Bank of Japan board members said the central bank would consider resuming interest rate increases if trade frictions de-escalate.

Australian dollar futures are higher as building approvals in the country rebounded 11.9% in June from May, which posted only a 3.2% growth. Trade balance figures also showed a 6.0% uptick in exports in June, a reversal from May’s -3.0% decline. Imports fell -3.1% from May, increasing the country’s trade balance in June to 5.365 billion from 1.604 billion in May. New data on inflation expectations also showed that expectations remain anchored at 2.3%, another positive sign for the Reserve Bank of Australia to cut rates at its meeting next week. Markets are already fully priced in for a quarter-point rate cut to 3.60% from the RBA. Data from ANZ and the employment website Indeed showed the Australian job ads fell 1% in July, suggesting the labor market is easing gradually. Household spending rose modestly in June, although spending on services fell for the first month in three.

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve following the weekly initial claims figures. Markets will now eye a $25 billion auction of 30-year bonds today and await President Trump’s choice to fill Governor Kugler’s slot on the Fed Board.

Yields ticked higher on Wednesday, spurred by a weak auction of 10-year notes, which followed another sloppy auction of 3-year notes on Tuesday. The 10-year note saw a bid-to-cover ratio of 2.35, which was the weakest in a year, while primary dealers (who are required to bid at auctions) took home 16.2% of the sale, the highest percentage in a year. The auction showed weak demand as investors likely perceived the high supply and relatively expensive rates as unattractive given the macro environment. Prior to the auction, yields briefly spiked, with the 10-year yield hitting a session high of 4.283%, which coincided with a sharp move lower in Treasury, likely a result of hedging in case of a poor auction or someone trying to cheapen up the market heading into the sale.

Data on Tuesday showed a stagnation in services sector growth, raising fresh concerns about the underlying momentum of the US economy. Additionally, employment contracted for the second consecutive month, and at a faster pace. The prices paid index accelerated, suggesting that inflationary pressures remain persistent despite weakening labor market conditions. Businesses continue to cite trade policy uncertainty, particularly tariff-related disruptions, as a major concern, with a noticeable rise in commodity costs adding to input price pressures.

For the Federal Reserve, this mixed data complicates the policy outlook. On one hand, softening employment and tepid activity could justify a more dovish stance, especially if broader economic indicators begin to deteriorate. On the other hand, the uptick in input prices, driven in part by tariffs, may reinforce inflation risks, limiting the Fed’s flexibility to ease. This tension is likely to be reflected in bond market dynamics, where investors may begin to price in greater uncertainty around the Fed’s rate path, as seen in yesterday’s 10-year auction. Yields could remain volatile as markets weigh the trade-off between slowing growth and sticky inflation, with front-end rates particularly sensitive to evolving Fed guidance. Fed Governor Cook, who is seen as a dove, said on Wednesday that the recent jobs report merits concern, adding that the big revisions in the data “are somewhat typical of turning points” in the economy.

Weaker labor data will continue to pressure the Fed into lowering rates further; the Fed will have an August labor report in its inventory ahead of its meeting in September. If data from the August jobs report continues to paint a picture of a grim labor market, a 50 bp cut from the Fed would not be off the table. However, many states have reported they have been behind in claims processing in recent months as outdated technology issues, decreased staff, funding issues, and backlogs of appeal delays have potentially impacted survey results. Future jobs reports and revisions will continue to garner attention for those reasons and could add to speculation regarding the integrity and accuracy of the data. President Trump fired a top Labor Department official on Friday, while the departure of Fed Governor Adriana Kugler offered Trump the chance to reshape the Fed.

The spread between the two- and 10-year yields rose to 51.2 bps from 49.7 bps on Wednesday.

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