The end of what appears to be a perpetual trade war for economic dominance is not in sight, but the impact of import tariffs is being felt, and the signs are inauspicious. The US government claims that the additional cost of imports is borne by the exporter, but the Bureau of Labor Statistics respectfully disagrees. US headline inflation rose to 2.7% last month, higher than expectations and the May reading. The core CPI was 2.9%, which is right between the forecast and the May value. After the release of the data, Donald Trump immediately reiterated his demand to cut interest rates. With inflation expectations around 3% by the end of the year, his wish is unlikely to be granted in July.

The latest US salvo towards Russia failed to reignite fears of sustained supply disruption, and as a result, oil continued to drift lower yesterday. The retreat was partially offset by the eternally buoyant OPEC, whose updated monthly report envisages a solid and even robust economic and demand outlook for the remainder of the year. Its view is in line with that of equity investors, who likewise see no impending economic fallout. US, OECD, and global stock movements will confirm or contradict this prognosis, and last night’s API data, showing builds across the board, goes against this optimism.

Bullish or Bull Something?

The outlook for the global economy and financial markets is, to put it mildly, blurred. Yet stocks, both in the US and abroad, sweep aside any concerns, uncertainty, or unpredictability that import tariffs, tax changes, or spending cuts might raise. The post-Liberation Day bloodbath proved fleeting, followed by a confident rebound in equities that pushed the MSCI All-Country Index to a record high by last Thursday, almost 30% above the April 7 trough. The Nasdaq Composite Index has been equally, if not more, impressive, climbing 40% above its April low.

Throughout this remarkable rally, the capricious policymaking of the Trump Administration continues to sow ambiguity and distrust. Nonetheless, equity investors seem undeterred. The performance of the stock market and the perceived or actual health of the economy are closely intertwined. As such, economic growth expectations might offer insight into whether the current sanguine view is sustainable, or if what we’ve seen since April is, in fact, overconfidence.

The White House naturally maintains that tariffs are a necessary tool to end the unfair advantages trading partners enjoy through persistent trade surpluses. It is also quick to tout the growth-stimulating effects of lower taxes, conveniently omitting that these are extensions of already existing cuts. One approach to assessing the future is to examine the four key components of GDP: consumption or consumer spending, investment, government spending, and net exports, and project the potential impact of import duties and the US budget bill on each.

Consumer spending: US consumer spending declined by 0.1% in May after rising 0.2% in April. This decrease is partly attributed to a pullback following pre-emptive purchases made ahead of higher import taxes. Spending on durable goods fell sharply, while spending on services continued to grow, albeit at a slower pace. Looking ahead, consumer spending—an essential pillar of GDP—will likely face headwinds from persistently high interest rates, elevated import tariffs, and rising credit card and auto loan delinquencies. The tax cuts announced in the Big Beautiful Bill (BBB) disproportionately benefit high earners. According to the Tax Policy Centre, individuals earning $217,000 or more will receive two-thirds of the total cuts. In contrast, those earning between $17,000 and $51,000 are expected to be around $700 worse off—a significant drag on consumer spending. Overall, the combined effect of the budget bill and tariffs on consumption is negative.

Investment: The legislation reduces the corporate tax rate from 35% to 21%. In theory, this should increase the return on investment and spur capital spending and hiring, which is likely a factor behind the current stock market rally. However, if the 2017 experience offers any guidance, we may see a short-term boost followed by slower investment growth next year due to trade uncertainty, as well as increased share buybacks and dividends at the expense of productive investment. While higher trade barriers might encourage domestic investment, they could also raise input costs and disrupt supply chains. The benefits of the BBB are likely to be transitory.

Government spending: The BBB significantly reduces government expenditure, particularly in healthcare, while increasing defence and border security spending. The Congressional Budget Office projects over $1 trillion in savings over ten years from cuts to Medicaid, green energy initiatives, and food benefits. Meanwhile, defence and border security spending will rise by $279 billion. When the $4.5 trillion in tax cut extensions are factored in, the net increase in the budget deficit is expected to reach $3.3 trillion. This deficit must be financed, which explains the President’s persistent pressure on the Federal Reserve to cut interest rates, regardless of broader economic signals. In 2025 alone, the US government is forecast to spend $952 billion on interest payments, according to the Peter G. Peterson Foundation. When a government must borrow to pay interest on money it had previously borrowed, it loses the fiscal flexibility to stimulate growth. Government spending cuts inevitably impede growth.

Net export (trade balance): The US runs a persistent trade deficit. Whether trade deficits are inherently harmful or simply the result of comparative advantages and high domestic consumption is a subject of debate. President Trump appears committed to narrowing this gap. If successful, the resulting increase in tariff revenues could bolster federal finances. In 2024, the US trade deficit stood at $918 billion. The most recent data shows a $71 billion deficit in May of this year. Consequently, US tariff revenues reached $24.2 billion in May and surged again in June, exceeding $100 billion for the first time in a fiscal year. While this justifies the imposition of duties in fiscal terms, the downside, higher input costs and supply chain disruptions, leads to inflationary pressures.

Tax cuts may provide temporary support for growth, and rising tariff revenues could ease fiscal pressures. But overall, the combined effect is likely to be negative. The key question is whether the President will persist in erecting trade barriers or begin to back away. He has already postponed the implementation of excise duties twice in the past four months. The stock market appears to be betting on a retreat. We’re not so sure. If the market has become complacent, the consequences could be severe. It’s worth remembering that the average tariff rate before Trump was around 2–3%. A rise to even 10–15% would risk economic slowdown and/or renewed inflation.

Another reason why a retreat is unlikely is that Donald Trump has shown little interest in mastering the art of politics—that is, the willingness to compromise. His preferred tools are coercion and exploitation, and a compliant Republican Party, Congress and judiciary are unlikely to restrain him. Imposing unilateral tariffs and an unwillingness to compromise will, in time, backfire.

A story from 20-odd years ago illustrates the danger of rigidity. A UK trade union leader was instructed by delegates not to compromise during wage negotiations and to secure a 5% raise or nothing. When he returned to report the outcome, he said simply: "I just did what you asked. I got you nothing."

Overnight Pricing