Over the weekend, the US announced a 30% tariff on the European Union, starting on August 1. The EU is pausing its trade retaliation against the US to allow for more discussions. Mexico has also expressed dissatisfaction with the new tariffs. The international response to these tariffs is still unclear. The EU hopes to negotiate a deal by early August, and Mexico, while unhappy, is open to talks. The market is closely watching trade developments and potential negotiations in the coming weeks.

US Economic Data

Attention is now on key US economic reports. The Consumer Price Index (CPI) report will be released tomorrow. The chance of a Federal Reserve (Fed) rate cut this month seems low, but the September meeting is significant, with a 67% likelihood of a 25 basis points rate cut, according to Fed funds futures. Inflation data will be important in shaping expectations after recent dovish Fed statements. Later in the week, we can expect the Producer Price Index on Wednesday, along with retail sales and weekly jobless claims on Thursday. These reports will have a major impact on financial markets and economic forecasts. The US is clearly taking a firmer stance on tariffs, extending them to the EU and Mexico. This 30% tariff, effective August 1, increases trade pressure from Washington. Brussels is trying to avoid deteriorating trade relations by delaying any retaliatory actions for now. Mexico, while dissatisfied, is still willing to engage in discussions, keeping communication open despite its displeasure. This situation indicates that while the risk of a retaliatory trade spiral has decreased, it has not disappeared completely. Trade tensions can influence global pricing, inflation expectations, growth, and supply chains. As we approach mid-August, any prolonged stalemate or breakthrough—even slight changes in tariff language—could impact equity and fixed income volatility, especially in the short term.

Market Alignment

Markets are closely tracking US economic indicators, especially the upcoming inflation data. This week, Fed funds futures suggest a low chance of action at the next meeting but a higher likelihood of a rate cut in September. Therefore, tomorrow’s CPI report is crucial. The Fed has leaned toward more accommodating policies recently, but any unexpected rise in CPI could complicate that approach. We should focus not only on the headline number but also on core figures, which are less volatile and provide insight into underlying inflation. Surprises here could change expectations for the September meeting and affect money market curves that influence short-term interest rates. It’s also important to watch how shelter inflation behaves, as its inconsistencies may change. Later in the week, we’ll see producer price data—often less impactful but useful for tracking margin pressures in earlier stages of production. Then on Thursday, we have retail sales and jobless claims reports. The latter serves as a current indicator of labor market health, affecting household spending. Low jobless claims combined with strong retail sales could challenge current assumptions about economic stability and policy easing. Conversely, weak data could support a dovish Fed stance without additional commentary. Looking ahead, determining the direction of inflation and the stability of the labor market are our main priorities. Volatility may return—not necessarily from the events themselves but from their implications for short-term interest rates and market consensus for the rest of Q3. We will adjust our implied volatility curves accordingly, monitor calendar spreads around September, and be aware of potential risks around data releases with significant impacts. We aim to remain flexible. The broader risk appetite relies on clear information, which is currently limited. We should reevaluate spreads, durations, and strike positions due to the event-driven, time-sensitive nature of upcoming catalysts. In short, stay alert during the CPI release. Create your live VT Markets account and start trading now.

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