S&P 500 breaks a record, Japan and EU trade deals deliver
Summary
Stock markets continued their upward trend last week with the S&P 500 gaining 1.47% on the week (9.42% YTD), hitting a record, while existing home sales dipped. President Trump announced a trade deal with Japan, which includes reciprocal tariffs and a large Japanese investment package. President Trump also announced a deal with Europe on Sunday. The labor market remained steady, with hiring holding firm in June. The 10-year Treasury yield closed the week at 4.40% — 4 bps lower compared to a week earlier.
U.S. trade policy and interest rates
President Trump’s recent trade agreements, particularly with Japan and Europe, have attracted significant attention. Under the new agreements, both Japanese and European imports will face a 15% reciprocal tariff, notably lower than the previously threatened rates. While the Japan deal promises a substantial $550 billion Japanese investment package, and the European deal included a pledge to buy $750 billion worth of U.S. energy, concrete details remain limited at this stage. Many economists believe the looming August 1 tariff deadline is unlikely to trigger a market reaction like the aftermath of Liberation Day. However, the recently announced trade deals only cover about 10% of all U.S. imports.
Although the pass-through of tariff costs to consumer prices has been less pronounced compared to the 2019 tariff round, the current measures are broader in scope. It is still too early to gauge the full impact, given that the most significant tariffs only took effect on April 2 and may require several months to filter through the economy. Meanwhile, the Federal Reserve is expected to maintain current interest rates, despite persistent pressure from the White House for rate cuts. Governors Bowman and Waller are likely to dissent. Market expectations for rate reductions later in 2025 remain largely unchanged, with 25 basis point cuts anticipated in both September and December. The markets will also be watching the Quarterly Refunding Announcement from the Treasury this week, and while no significant changes are expected, the President suggested more short-term debt should be issued while they wait for longer-term rates to come down.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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Key economic news and releases
Durable goods orders fell sharply by 9.3% in June, marking the steepest drop in over a decade, outside the pandemic, mainly due to a $31 billion reversal in commercial aircraft orders. Core orders also edged down by 0.7% against expectations of a slight increase. Existing home sales slipped 2.7%, reflecting a cooling housing market amid high mortgage rates. Meanwhile, the labor market remained stable, with 147,000 jobs added in June and the unemployment rate steady at 4.1%.
The week ahead
This week’s key economic data includes consumer confidence and job openings on Tuesday, the first look at Q2 GDP growth and the FOMC’s rate decision on Wednesday, PCE on Thursday, and then the Friday jobs report and the University of Michigan sentiment survey to close the week.
Disclaimers
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