Tariffs Take Center Stage As Banks Hold the Line

Transcript

Hey everyone and welcome back to the market weekend review for the week ending August 1st, 2025. My name is Caric Aurora. I'm a summer associate on the investment strategy team here at Russell Investments. It's been a big week for the macroeconomy and we've had developments all around the globe. In this episode, let's take a look at three of those. First, North American Central Bank decisions with both the Fed and the Bank of Canada having met earlier this week. Second, the latest tariff news from the White House and how global trade has shaped up leading up to the August 1st deadline. Finally, China's recent pilot bureau meeting. Let's dive into each of these. Starting with interest rate decisions. On Wednesday, the Fed decided to hold rates steady at 4 and a/4 to 4.5%. Making this the fifth consecutive meeting without a rate change. That decision passed 9-2 with governors Waller and Bowman remaining dovish. At the start of the week, we got the Jolts data, which does suggest that we're still in a low turnover environment. Continuing jobless claims held flat as well. On balance here, the labor market appears to be relatively resilient. GDP came in strong, while the core components of GDP edged very slightly lower, but they do remain positive overall. The Fed refrained from giving us an exact timeline, but our base case here at Russell Investments remains to be a cut in September with the door remaining open to a second cut during the rest of the year. Meanwhile, the Bank of Canada remains steady at 2.75% in order to balance the effects of weak growth and the current US tariff policy. This decision does come at a tough time of labor market weakness in Canada where the unemployment rate is elevated. On the economic front, GDP contracted in both April and May, and it's expected to be subdued even in Q2. From our perspective here at Russell Investments, we believe that the current trajectory will require more aggressive rate cuts when the BOC does eventually decide to start easing their monetary policy. Shifting our focus here to trade policy, the global tariff environment remains to be a key watch point this week ahead of the August 1st deadline. The good news is that the US has reached agreements with the majority of our top 10 trading partners, for instance, the EU and Korea. The challenge is that these agreements have come in higher than the 10% baseline that occurred during the pause period. That makes this the highest effective tariff level since the 1930s. So, while near-term policy uncertainty may be reduced somewhat, macro uncertainty remains to be broadly elevated. Our expectation is that the effect of tariffs and retaliatory measures will be a modest drag to real GDP growth annually. Looking ahead, our base case remains to be a soft landing where the US will be able to avoid recession. Lastly, let's switch our focus to the global landscape. This week, China's top leadership held a meeting of the pilot bureau. Although we didn't see specific stimulus measures in that meeting, they did re-emphasize their commitment to the economy. And we know that the government has set up a 5% growth target earlier in the year. That may be difficult to achieve in light of macro headwinds such as challenges to the property sector, elevated youth unemployment, and that lower PMI data that we saw this week. Nevertheless, we expect to see more stimulus on the policy front. There are these cyclical headwinds, but equity valuations still do appear relatively attractive when compared to the US. Ultimately, we believe that a long-term and diversified approach is essential when navigating global opportunities and risks. That's all for this week and we'll see you next time on Market Week in Review. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key Takeaways

Fed, BoC keep rates steady
Macro uncertainty still high
More stimulus possible in China

In honor of National Intern Day in the United States and Canada, Kartik Arora, a summer intern on the investment strategy team, hosted this week’s edition of Market Week in Review. Arora explored the recent rate decisions from the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC). He also reviewed the latest global trade developments as well as highlights from China’s Politburo meeting.

Holding Pattern

Arora began by noting the Fed left interest rates unchanged after its meeting on Wednesday. This was the fifth time in a row the central bank made no adjustments to monetary policy, although two members of the voting committee were in favor of a rate cut.

“Fed officials refrained from providing a timeline for when a cut could occur, but we think September is a likely timeframe. We also think the door is open to another cut later in the year,” Arora said. He added that with the U.S. labor market remaining resilient, the decision is more likely to hinge on the inflation backdrop.

The Bank of Canada also opted to keep rates steady this week, Arora said. He explained that uncertainty over U.S. tariff policy played a role in the decision.

“The BoC is in a tough spot, with a weak labor market and slumping economic growth. From our perspective, we think when they start cutting rates, a more aggressive pace will probably be needed,” he said.

Tariff Toll

Shifting to trade, Arora noted the United States has struck agreements with a majority of its key trading partners, including the European Union and South Korea.

The challenge, he said, is the tariff rates in these deals are higher than the 10% baseline rate announced in April. “This makes today’s effective U.S. tariff rate the highest since the 1930s. So, although short-term trade uncertainty has been reduced, macroeconomic uncertainty remains elevated,” Arora explained.

Overall, the strategist team expects tariffs to have a modest drag on U.S. growth this year, with an economic “soft landing” still the most likely outcome, he added.

Under Pressure

Pivoting to China, Arora said the country’s top leadership re-emphasized their commitment to economic growth during a recent Politburo meeting.

However, the government’s 5% annual growth target may be difficult to achieve in light of macroeconomic headwinds. “China is confronting a struggling property sector, elevated youth unemployment and a slowdown in manufacturing,” Arora remarked.

This strengthens the case for potential stimulus in the months ahead, he said, adding that Chinese stock valuations still look relatively attractive when compared to their U.S. counterparts.

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