Resilient > Pressured

• The US economy remains strong despite rates, inflation  and policy related headwinds.

• The US is making good progress on negotiating trade agreements with partners.

• However, Tariffs = Inflationary.

The US economy remains remarkably resilient. This was evident once again in the labor market, with unemployment holding at 4.1% in June. The latest reading on initial jobless claims declined to 217k from 221k (below the consensus of 226k), marking the sixth straight weekly drop. This continues to surprise me, especially in light of the post–Liberation Day headlines about headcount reductions. Continuing claims were flat at 1.955 million, in line with expectations—suggesting a longer path to re-employment for those already out of work.

 Source: Bloomberg

Affluent consumers remain active spenders, as reflected in AMEX’s earnings. Retail sales ex-autos & gas rose 0.6% (consensus 0.3%, prior -01%). This figure is not adjusted for inflation, which ticked up slightly to 2.9% YoY from 2.8% YoY last month.That said, the outlook from major U.S. airlines were mixed due to tariff-induced volatility weighing on consumer sentiment.

Who is bearing the cost of tariffs so far? Import prices ex tariffs were flat in June, suggesting exporters are not bearing the tariff burden. Per analysis completed by Bloomberg, import prices including tariffs rose by 11% in line with the increase in tariff rates this year. In short, both businesses and consumers in the U.S. are absorbing these costs. This was also reflected in earnings from import-heavy companies like GM (automotive) and RTX (defense). However, this analysis does not include the impact of the decline in USD this year. The decline in the USD would in theory offset any price reduction by exporters. The DXY index, which measures the strength of the USD against a limited basket of currencies has dropped from a high of 110 in January to 97.4 at the time of this writing.

DXY (source: Bloomberg)

Trade agreement between the US and Japan: The deal caps tariffs on Japanese goods at 15%, down from the 25% previously threatened by President Trump. Interestingly, that 15% is lower than the 25% US manufacturers must pay on parts imported from Canada and Mexico. As part of the agreement, Japan has also pledged $550 billion in “new capital” to support major US projects—via equity investments and credit guarantees. Details remain sparse regarding terms and whether these are public or private sector projects. If public, this could provide an alternative source of capital that eases pressure on the already-leveraged US balance sheet.

Bottom line: Persistent inflation pressure and a still-resilient jobs market suggest short-term rates will stay elevated. Meanwhile, ongoing policy uncertainty and continued political attacks on the Fed may contribute to a higher term premium on long-duration Treasuries. I remain hopeful that progress in trade negotiations could help cap inflation, but in the near term, I expect inflation to trend higher.

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