Insight Talks

In this episode, James and Giles take a closer look at the key market moments from July - starting with the latest wave of global trade tariffs (1:33). With President Trump’s 1 August deadline now behind us, over 90 countries are facing higher tariffs… yet markets are still pushing higher. So, have we moved past peak-tariff uncertainty? 
 
Our experts also dig into the US economy, where tensions between President Trump and Fed Chair Jerome Powell continue to bubble (7:15). With fresh GDP and labour data backing calls for looser monetary policy, could the Fed be falling behind the curve? And what impact might Trump’s “Big, Beautiful Bill” have on the growing budget deficit? (10:50) 
 
Back in the UK, we saw a mixed picture in July (12:05). Slowing manufacturing is weighing on growth, but strong earnings have helped lift equities. James and Giles explore how inflation, jobs data and rising debt costs are shaping policy outlook. Plus, they reflect on Rachel Reeves’ recent Mansion House speech and what it didn’t reveal (15:05). 

This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities.
    
We’ve created this podcast to set out possible approaches. Please do not view it as financial advice, or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past, does not mean it will continue to do so. Our predictions are based on information that is currently available, however events and markets can and do change rapidly. 

Creators and Guests

Host
James Tulloch
James joined the company as an Investment Specialist in April 2019, providing regulated investment advice across our investment propositions.
Guest
Giles Parkinson
Head of Equities

What is Insight Talks?

Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.

Speaker 1:

We've created this podcast to set out possible approaches. Please do not view it as financial advice or its content as investment recommendations. Just because an investment or investment strategy has performed well in the past does not mean that it will continue to do so. Our predictions are based on information that is currently available. However, events and markets can and do change rapidly.

James:

Hello, and a very warm welcome to the August edition of the Insight Talks podcast with me, James Tulloch, joined as usual by our head of equities, Giles Parkinson. Welcome, Giles. Hey there, James. Just the two of us this month, Giles, as we try to take advantage of the slightly quieter holiday period, so a slightly shorter podcast this time around, but plenty for us to get into nonetheless. Once again, the the topic of trade tariffs rather dominated the the headlines with announcements of agreements reached.

James:

And then just last week, the announcement of an array of higher tariffs on goods from more than 90 countries came about as President Trump's August 1 deadline for trade partners to strike deals with The US passed. But despite a bit of a pullback late in the month and into the first few days of August, Equity markets have continued to march higher, with many indices continually registering all time highs over the course of July. So let's start with tariffs, Giles. An awful lot of noise around this topic. We began the month with Trump's initial deadline to agree trade deals extended from the July 9 to to that August 1 date.

James:

For for most countries, both of those deadlines have, of course, now passed. And without anything like the negative reaction we witnessed after Trump's so called Liberation Day back in early April. And and I guess that just underscores the notion that we are past peak tariff uncertainty as we've as we've discussed before.

Giles:

Yes. I mean, this is definitely story which is unlikely to fade away anytime soon. Mhmm. And I think we should expect Trump to continue rattling the cage of some of his trading partners sorry, some of The US's trading partners. I do think that for now, the major stumbling blocks have been overcome, James.

Giles:

So big ticks in the boxes would be agreements reached with the EU and Japan Mhmm. As well as the de escalation of the trade war with China. Remember, at one point a few months ago, there was a 145% tariff, which effectively a trade embargo Mhmm. Levied on China. So we've moved away from that.

Giles:

And this has calmed market jitters for now. So so those agreements with the major economies and trading blocks, Japan and EU, are big ticks in the box. The fact that US and China rode back from that trade flare up is also a big positive sign on willingness on both sides Mhmm. To find a resolution. Nevertheless, look, let's look at how has the landscape actually evolved now.

Giles:

Tariffs on US imports across the board have increased from an average 3% at the beginning of the year to maybe more like 15 or certainly a mid teens level now. Yeah. This is the highest level since the nineteen thirties. So the knock on impact probably won't be insignificant in the fullness of time, but for now, the market does seem to be taking comfort from the fact that things are less bad, less uncertain Mhmm. Than they might otherwise have been the case.

James:

Yeah. Yeah. Okay. Okay. You mentioned the the agreement with the the EU there.

James:

That was obviously a a major piece of news flow on the tariff front over the course of the month. So perhaps worth just re re recovering what was what was agreed there.

Giles:

Yeah. So the overall tariff rate, the broad tariff rate, is 15% on US imports from the EU. That ends almost four months of negotiations. It does avoid the proposed 30% level on all EU products if no deal had been made, so that's good. Now most European exports to The US are in scope.

Giles:

There's a few here and there, so 50% tariff on steel, for example, that remains in place. But there is also a list of agreed that some a short list of goods is is agreed that they're gonna face zero tariffs, certain raw materials, aircraft, chip making, and so on. Yeah. There's also you know, these deals can be complex things. There is reference to the EU spending 750,000,000,000 on US energy products and invest 600,000,000,000 into The US, including buying some military equipment.

Giles:

Mhmm. Now, look, but there's been quite a lot of confusion as to how much this investment or this expenditure is, a, actually new, or, b, things that the EU countries and EU companies would have done anyway. Also, there's a question, how does it actually get counted up and enforced? But again, the new 15% tariff level is significantly more than the rate previously that we had in place. Yep.

Giles:

So overall, I think there's a relief amongst policymakers and markets that trade war escalation was averted. On his flight back, the European Commission for Trade explained that the choice was simply between, quote, stability over total unpredictability. Yeah.

James:

Okay. And then as as noted, to to round off the month and take us into August, we had the expiry of the the August 1 deadline, which impacted those trading partners yet to reach an agreement with The US, which rather inevitably, given the time frame involved, is is most of them.

Giles:

Yeah. So as you mentioned, Donald Trump unveiled his latest tariff salvo last week. Latest tariff salvo. He signed an executive order to impose a wide array of levies on goods from more than 90 countries. However, there's a very small window for further negotiation as the White House said most of these measures will take effect from the August 7 rather than the first.

Giles:

Mhmm. Now the exceptions to this include Canada, but a new 35% rate, that's up from '25, took effect immediately. Although here, actually, most of the goods traded with Canada are in fact exempt because they're already covered by the preexisting US Mexico Canada trade agreements. Elsewhere, we've got a deadline of August 12 being set by China. Now this is after Beijing and Washington previously agreed to extend their trade war truce.

Giles:

And additionally, the deadline for a tariff deal with Mexico was extended by a further ninety days. Mhmm. So look, James, lots of moving parts here. As we said, the rather hotchpotch nature of the tariffs, their potential fluidity makes assessing the impact challenging, but the market reaction to such events has generally been very much more muted than it has been. Mhmm.

Giles:

Nevertheless, the extent to which tariffs are gonna start filtering into inflation and economic growth in employment prints and therefore influencing central bank policy does need very careful monitoring.

James:

Yeah. Yes. Indeed. Well, we'll we'll come on to the the policy response and and likely central bank action in just a moment. But just before we leave the topic of of tariffs, Charles, it's it's definitely worth reiterating that some doubts do remain over the legal basis for for Trump's tariffs, don't they?

Giles:

Yes. So let's divert down this particular rabbit hole for a moment or two. So what's going on? Trump has imposed the levies using the International Emergency Economic Powers Act, I e e p a. Now that legislation was usually reserved for sanctions and freezing criminal assets, not really to address trade imbalances, even if those things are bad in and of themselves, which is is yet to be proven as well.

Giles:

Mhmm. Now the question that's going through the courts is whether Trump can invoke these emergency powers to reshape US trade without consulting congress. That's the key point of contention. Eventually, this will probably end up in in the Supreme Court. However, actually, it's fast becoming a moot point, because by the time a final verdict is reached, many countries have already willingly signed US trade deals, whether it was under perceived duress or not.

James:

Okay. Let's let's move on to the the Federal Reserve then. We've had a continuation of the ongoing war of words between president Trump and Fed chair Jerome Powell, even if it's a rather one-sided war

Giles:

of words. Yeah. Indeed. So, look, Trump, to be frank, does risk undermining the independence of the Fed here and maybe thereby eroding some investor confidence as well. I mean, he's he's spoken routinely of potentially ousting Powell.

Giles:

Now Trump clearly believes and wants Powell to lower interest rates significantly to boost The US economy. Nothing stand. Actually, in any case, Powell's due to remain imposed until May 2026. But it's just these, James, it's just these fears around an earlier and potentially slightly more chaotic change and also potentially political appointment Mhmm. Does remain a little bit of a tail risk here.

Giles:

So, look, one of Trump's concerns is also that higher rates are inflating the cost of servicing The US's debt pile. But, look, the central bank's dual mandate is focused on maximum employment and stable prices inflation. In other words, not the cost of servicing US debt. Yeah. So the Fed, of course the Fed, of course, did keep interest rates unchanged again just at the last meeting, which was only Wednesday last week.

Giles:

And US interest rates have been held steady since last December, but that might be changing.

James:

Yeah. Sure. Yeah. Yeah. They haven't have indeed.

James:

But the latest US GDP and in particular Labour Market Day, which are released very shortly after the last Fed meeting, actually gave a bit more credence to the arguments of those calling for a looser monetary policy, didn't they? Are the Fed at risk of being behind the curve here?

Giles:

Yeah. Maybe. So just to touch on the chronology here, James. So the Powell's initial post meeting comment suggested he was comfortable with the decision. Mhmm.

Giles:

Rates were likely to pick up steady throughout the next meeting and into the foreseeable future, probably also on hold in September as well. However, at that point, in an unusual show of dissent, we did get two Fed governors actually voted against that decision Mhmm. Stating that they prefer to cut rates. Now, any level of formal opposition I mean, we're used to this when it's the Bank of England and the Monetary Policy Committee there and split voting. But, you know, you might get one dissenting vote out to Feb, but to get two votes is really rare.

Giles:

And this occurrence is the first time that that's actually happened in more than thirty years. So, look, that in a sense suggests that support for lower rates may itself be building. Mhmm. Stepping back here, the context is that most Fed policy may policymakers have preferred to sit tight in the hope that the impact of tariffs on both inflation and economic growth become clearer. Now, look, the concern for those calling for lower borrowing costs is that economic momentum is slowing, and this represents a risk to the employment side of the Fed's mandate.

Giles:

Yes. That changed last Friday. So having previously appeared pretty resilient, US labor market data released last week suggested a notably weaker picture over the previous three months. So to closely watch this in the non farm payrolls print suggested just 73,000 jobs have been added in July. Mhmm.

Giles:

But there were sharp downward revisions totaling over 258,000 to prior months. So add up the previous three months, that's only a 106,000 post jobs were added between May and July. Now that's not a that's not a three month average number. That is the total over the three months. Yeah.

Giles:

And so I think we've become used to job prints of a 100,000 a month out of The US for some time now. So this caused futures markets to move to price in an extra rate cut over the coming year, forecasting four cuts by the middle of next year.

James:

Mhmm.

Giles:

And the odds of a September cut, that's at the Fed's next meeting, greatly increased. They currently stand at 90%. That said, we've got two more inflation prints to get through before that September meeting and one more payroll report. Okay. Well well, maybe the prospect of that that that September cut will will please Trump.

Giles:

You mentioned one

James:

of the the concerns of of of Trump and those calling for for lower rates is the inflating cost of of servicing The US's debts. But Trump's signature tax and spending bill, his big, beautiful bill, which was which he signed into law during July after it passed through Congress, could well add to that issue, given that the extension of tax cuts and limited measures to Iranian spending could perpetuate the rather significant annual budget shortfall and add to the debt bar, couldn't it?

Giles:

Yes. I think I concur with that. So, look, the extension of tax breaks may be business and market friendly. The bill does add some 3,000,000,000,000 to The US national debt, which is already at a 124% of GDP. While Trump's bill although it's coming into law now, does include some spending cuts, these are not as significant as some had maybe hoped, and they were outweighed by the tax cuts.

Giles:

So, look, it is possible that the import taxes may actually help to plug the US government's 2,000,000,000,000 annual deficit between revenue and spending, so some potential help there. But, yes, I think that The US does still have some some fiscal questions that it needs to answer in terms of the sustainability or otherwise of that very high budget deficit level, which really is unprecedented during peacetime.

James:

Mhmm. Okay. Okay. And as as far as UK news flow is concerned, Giles, a not dissimilar picture in some respects, signs of slowing growth as a result of slowing manufacturing output in the over the second quarter of the of the year.

Giles:

Yes. So let's let's talk data. So The US so The UK sorry. UK economy unexpectedly shrank in May. That's according to latest ONS figures.

Giles:

Have GDP print minus 0.1% contraction. Economists were looking for plus 0.1. So look. These monthly GDP figures are often volatile, prone to revision, but at later sprint, it does follow a minus 0.3% contraction in April. A drop in manufacturing output and weak retail sales were cited as the key driver of May's reading.

Giles:

So, look, this sort of this news flow on weaker growth is probably a disappointment to the chancellor, Rachel Rees, who, as we pointed out numerous times, I think, on this podcast, has made fostering economic growth her top priority. Now slowing growth over the second quarter of year, of course, means that Reeves is then faced with the prospect of an increasingly tough trade offs come the autumn budget if she's gonna keep within the self imposed fiscal rules. And as we touched on last month, recent U turns on winter fuel payments and welfare spending cuts is likely to further erode the chances of financial buffer, meaning the announcement of tax hikes come October is becoming ever more likely.

James:

Yeah, yeah, sure. Sure. Now, the next Bank of England meeting takes place actually the day after we're recording, and the MPC is fully expected to implement a rate cut there. But thinking slightly longer term, the latest UK inflation and jobs data complicates the monetary policy landscape a little, doesn't it?

Giles:

Yeah. So we've just touched on growth. What's going else going on on other aspects of the economy? So inflation, UK inflation has reached an annual rate of 3.6% in June. Economists had been expecting the CPI index to stay at 3.4.

Giles:

What are what are the culprits? High food, energy, core good costs, clothing, transportation did record notable increases. But within that, it's the persistent rate of service sector inflation, which is somewhat linked to people's wages that's probably gonna trouble the Bank of England most. So, look, inflation remains above the Bank of England's 2% target. Rate setters are still very much expected to resume rate cuts, and we've got the next meeting tomorrow.

Giles:

Mhmm. UK labor market data in July has provided continued signs of gradual weakening. So inflation's higher, jobs a bit softer. On those jobs, we had revisions to prior months, which also were consistent with a gradually easing labour market there.

James:

Yeah.

Giles:

So the unemployment rate did increase marginally from 4.6 to 4.7 in the three months to May. But look, mudding the waters as far as the Bank of England's concerned, inflation is rising, while the labor market is weakening, and growth remains sluggish. So UK businesses appear to be passing on the high costs of those increased national insurance contributions, as well as that rise in the minimum wage that they're contending with at the moment. So net net, I think all this data does leave the Bank of England less flexibility to lower borrowing costs for households, as this could exacerbate inflation. And as we've been discussing for a few months now, pressure is mounting on chancellor Reeves to consider tax rises in the autumn budget to maintain fiscal credibility.

James:

Indeed. Indeed. And Reeves delivered her Mansion House speech over the the month of July, but that gave very little away, really. And another similarity with the situation in The US is the increasing budget deficits that The UK is facing and the cost of servicing debt as well.

Giles:

Yeah. So what's been going on with that debt and borrowing? So so in June, the UK government borrowed over 6,600,000,000.0 more compared to the June. That was the second highest June figure since records began in 1993. Only June 2020 in the depths of COVID pandemic did we outstrip that.

Giles:

Mhmm. Now, look, paying interest on central government debt, especially those index linked gilts, jumps to 8,400,000,000.0 against June 2024. So, look, in its first year of power, Labour has therefore cumulatively borrowed some 22,000,000,000 more than forecast. The roughly 10,000,000,000 fiscal buffer that Reads has set aside at their first budget has largely evaporated. Yep.

Giles:

That just adds, I think, to the likelihood that without reducing public spending or igniting growth, Reeds is going to have to eke out more breathing space through tax hikes to keep within her fiscal rules.

James:

Yeah. Yeah. Okay. Okay. And market wise, Giles, equity markets have continued to march higher, as we noted at start.

James:

And that has been in part because of the macro news flow and the anticipated policy response. But second quarter earnings reports have provided a real tailwind for stocks as well, haven't they?

Giles:

Yeah. Very much so. We've had strong earnings reports. It's really only reinforced the view that all the macro and geopolitical turmoil of the second calendar quarter since April, since Liberation Day, has really had only a muted impact on company earnings as things stand, point one. Or point two, where there was any impact, there's a very consistent message coming out of companies that there was sequential monthly improvement after April, and that's carried on into July.

Giles:

Looking back at the performance of various types of stocks in the last month, so over July, the more cyclical stocks have outperformed defensive stocks, and the continued strong performance of US technology sector has lifted growth stocks over value stocks.

James:

Okay. Okay. As always, Giles, thank you so much for your insight. Wonderful to get your thoughts as ever. For any listeners interested in learning or exploring the subject of tariffs a little bit further, I would flag the Insight Focus pieces on our website.

James:

These are written pieces. There's been a number over recent months with the latest published just last week, so do explore those if of interest. And as ever, thank you so much to everyone for listening. I do hope you all will get to enjoy a nice summer break, or you've had a very nice break if you've already taken one. We will be back in early September to record another podcast, but until then, a very goodbye.

James:

Thanks very much.