Both US risk assets and US economic data continue to hold up much better compared to widespread pessimism after the administration’s tariff announcements in early April. The full impact of tariffs on the US economy, however, is likely to make itself felt only over the summer.
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Since early April the US yield curve has steepened, with the yield of the 10-year US Treasury bond rising by around 30bp and the 2-year yield up by 15bp.
Over the same period, the S&P 500 index has gained about 5.5%.
Hard data on the US economy has been robust so far, with the latest inflation, payrolls and wage numbers suggesting the impact of tariffs on imports into the US has yet to feed through to the data. We expect that even the lower level of tariffs now being envisaged will not prevent a slowing of US growth and a rise in inflation during the rest of 2025.
Little impact, yet, of tariffs on US jobs or inflation
The non-farm payrolls report published on 7 June showed the economy added 139,000 jobs in May, compared with a downwardly revised 147,000 posts in April. March figures were also revised down, bringing the average jobs gains for the year until May to 124,000, compared to 168,000 in 2024.
The labour market numbers suggest that the pace of hiring is coming off gently at a rate that matches a slowdown in the supply of labour (less immigration into the US, a slight pullback in labour force participation). Wage growth shows little sign of inflationary pressures. Overall, it appears that uncertainty over trade policy is having little effect on the job market.
Data published on 11 June showed the US consumer price index (CPI) rising less quickly in May than expected by consensus forecasts as the tariffs have yet to fully feed through to consumer prices.
The headline CPI rose by 0.1% month-on-month in May versus a consensus forecast of 0.2%, pushing the year-over-year rate to 2.4%, up slightly from 2.3% in April. The core CPI, which excludes volatile food and energy prices, also rose 0.1% MoM, well below the consensus forecast of 0.3%. On a year-over-year basis, core inflation held steady at 2.8% for the third consecutive month.
It looks likely that a stocking-up of inventories in the first quarter ahead of the anticipated tariffs delayed some price increases despite many businesses indicating they intend to pass on the tariff-induced costs.
US companies have been coming to terms with the fact that the administration’s tariffs are here to stay – reinforced by the announcement this week of a framework for a US-China trade deal. This would maintain this year’s hike in US tariffs on Chinese goods by 30% to 55%. As inventories are run down, broader price increases are likely to emerge over the course of the summer.
In the view of our macroeconomic research team, core CPI inflation will rise towards 3.5% year-on-year by the end of summer.
A transitory impact from tariffs?
Recent comments suggest US Federal Reserve officials expect the tariffs push up prices first and only later hurt the labour market.
Fed Governor Adriana Kugler delivered this message last Thursday at the Economic Club of New York: “I see greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road, and this leads me to continue to support maintaining the FOMC’s policy rate at its current setting if upside risks to inflation remain.”
This view is shared by Governor Waller, a policymaker on the rate-setting FOMC who has developed something of a habit for guiding markets with his speeches. Last week, he delivered a speech entitled “The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence and Inflation Expectations.”
Governor Waller indicated that: “Given my belief that any tariff-induced inflation will not be persistent and that inflation expectations are anchored, I support looking through any tariff effects on near-term inflation when setting the policy rate.”
It would appear likely then that the Fed is currently more focused on the goal of maximum sustainable employment relative to maintaining price stability within its dual mandate.
The resilience of the labour market in the first half of 2025 has led financial markets to dial down their expectations for interest rate cuts in 2025 from four 25bp rate cuts to two.
Employment gains from the formation of new businesses, strong job growth in less tariff-sensitive sectors such as education and healthcare, and the reluctance of firms to lay off workers following a severe post-pandemic labour shortage have all helped maintain a healthy level of job creation in the US labour market.
Looking ahead, we expect the labour market to weaken: it is questionable whether it will deteriorate by enough to force the Fed to cut rates significantly despite any upside pressures to inflation.
We expect no change in rates at the June or July meetings of the Federal Open Markets Committee, but the meeting on 16-17 September could well be the occasion when the Fed is confronted with a higher level of inflation in combination with a weaker job market.
A hawkish cut from the ECB
Monetary policy diverged further between the US and the eurozone when, as expected, the European Central Bank delivered the eighth cut in this cycle of rate reductions, taking the key deposit rate from 2.25% to 2%.
ECB President Christine Lagarde said the central bank had ‘nearly concluded’ the latest monetary policy cycle, which has seen policy rates fall from a peak of 4% last June.
The ECB could cut further this year (despite comments to the contrary last week). It has low headline inflation forecast for 2026, but argues inflation should return to its 2% target by 2027. We still expect the ECB to deliver at least two more cuts of 25bp this year as trade policy uncertainty weighs on both growth and inflation in the eurozone.
Important meetings ahead for Europe and the world
This month will see several international meetings with potentially important implications for European security (Ukraine), economics (tariffs) and defence (Nato):
- 15-17 June, G7 Summit in Canada
- 24-26 June, NATO Summit in The Hague
- 27 June, EU leaders meeting in Brussels.
The US administration last month announced a 20% tariff – or import tax – on most EU goods, but later cut this to 10% to allow time for negotiations scheduled to end on 9 July.
This week, US Commerce Secretary Howard Lutnick said the European Union is likely to be among the last deals that the US completes on tariffs.
