It's been over six months since the second season of Donald Trump's trade war saga began, and the situation is far from improving. When it comes to key partners, the number of actual trade deals or framework agreements can be counted on one hand: the EU, Japan, South Korea, the UK, and Vietnam.
There has also been an agreement with China, but it is unlikely to be signed before the August 12 deadline.
The real problem with this endless back-and-forth is the uncertainty it injects into everything, not just for financial markets — which, however, judging by the recent rise in the S&P 500 and Nasdaq, have clung to the hope of an increasingly distant soft landing — but also for the Federal Reserve.
Fears that continued trade wars will cause a spike in U.S. inflation prevent the Fed from lowering interest rates. After all, tariffs are essentially import taxes, and someone has to pay: companies, through reduced profit margins, or end consumers, through higher prices. So far, most of the burden has fallen on businesses.
Many companies have been absorbing costs by cutting their own margins rather than raising prices, trying not to lose demand. The more forward-thinking ones stocked up on products in advance to delay price hikes. Now, companies will have to react if the uncertainty surrounding tariffs persists — or worse, if they actually go up.
And it is already happening. The June PCE report showed that tariffs are starting to have a more noticeable impact on consumer prices: headline inflation rose 0.3% month-on-month and accelerated to 2.6% year-on-year. Core inflation also rebounded, rising by 0.3% m-o-m and reaching 2.8% y-o-y.
Yet, on August 1, the President signed another round of import tariffs, affecting 60+ countries and territories. They are scheduled to go into effect at 12:01 a.m. on August 8. If so, the markets could be headed for a repeat of April 2: a spiral of risk aversion, with equities and the US dollar falling.
Even the hope of an early Fed rate cut may not be enough to save the markets this time. This will not be due to inflation being under control but rather a sign that the U.S. economy is slowing, especially the labor market. That's not a victory: it's a warning sign that could spook investor sentiment.
The last hope lies with corporate earnings. AMD's results, which will be a key indicator of chip demand, will be released this week. Disappointing figures could further dampen the overall market mood. On the other hand, if its earnings beat expectations — as Microsoft and Meta did last week — it could help support the market.