Baker Market Update 2025-07-11

With little in the way of economic data this week, markets focused on the evolving trade landscape and federal funding woes. President Trump opened a new phase in the trade war on Monday by notifying 14 nations that they will face sharply higher tariffs beginning on August 1st. He signaled opportunities for additional negotiations but warned that reprisals would draw an equivalent response from the U.S.

In letters released on his Truth Social platform, President Trump told Japan and South Korea "If, for any reason, you decide to raise your tariffs, then, whatever the number you choose to raise them by, will be added on to the 25% that we charge." Stocks fell in response on Monday and Treasury yields edged higher but largely settled back by the end of the week as traders continued to price in very little tariff risk.

There was also a fair amount of news this week on the fiscal deficit dilemma after the One Big Beautiful Bill Act was signed into law over the fourth of July holiday. It has been widely reported that OBBA tax and spending package is expected to add $3 trillion to the deficit over the next decade and strategists warn this could eventually pressure the Fed’s independence as it has to balance its dual mandate objectives with the cost (i.e. interest rates) of paying for the U.S.’s escalating debt burden.

Also this week, the Fed released minutes from its June meeting highlighting a prevailing theme of uncertainty among the committee members. Most participants warned that proposed tariffs could have “persistent effects” on inflation, rather than being just a one-time disturbance but also noted that there’s still significant uncertainty around how long and how much prices could be pressured. Policymakers are also still split on the timing of the next rate cuts with the majority (10) anticipating at least two quarter-point rate cuts by year-end and 7 expecting none. Fed Governors Bowman and Waller explicitly said they would consider a rate cut at the July meeting, if incoming data aligned but others preferred to wait until September.

Fed funds futures suggest a ~65% chance of a September cut, with two full cuts priced in by the end of 2025. This despite headline risks and rising effective tariff rates, now at their highest in 90 years. A strong 10-year Treasury auction midweek signaled that demand for U.S. debt remains firm, even as fiscal concerns mount. The bond market’s own “fear gauge,” the MOVE index, hovered near year-to-date lows, reflecting a surprising degree of calm amid all the uncertainty.

Next week, the data docket picks back up with CPI, PPI, retail sales and housing data. Have a great weekend!