Insights 
VT 
Over the weekend, the US announced a 30% tariff on the European Union, effective 1 August. The EU is extending its pause on US trade retaliation to facilitate further discussions. Mexico is also affected by the new 30% tariffs, expressing dissatisfaction with the US decision.
The international response to these increased tariffs remains uncertain. The EU aims to negotiate a deal by the start of August. Mexico, despite its dissatisfaction, remains open to discussions. The market is closely watching the unfolding trade dynamics and potential negotiations over the forthcoming weeks.
Us Economic Data
Attention is now shifting to vital US economic data releases. The US Consumer Price Index report is scheduled for tomorrow, while the chances of a Fed rate cut this month appear minimal. However, the September meeting remains of interest, with a 67% chance of a 25 bps rate cut according to Fed funds futures. Inflation data will be crucial in guiding expectations, following recent dovish Fed policy statements.
Later in the week, important economic reports include the US Producer Price Index on Wednesday, followed by retail sales and weekly jobless claims on Thursday. These releases will significantly influence financial markets and economic predictions.
From what’s been announced, it’s now clear the US has taken a firmer stance on tariffs, extending its reach to both the European Union and Mexico. By setting a 30% tariff rate effective from the start of August, Washington has again turned the dial on trade pressure. Brussels, attempting to prevent a deterioration in trade relations, is purposefully delaying any retaliatory steps, at least for now. Mexico, although clearly displeased, appears to be maintaining a seat at the discussion table – not closing doors, but not happy either.
What this tells us is that the immediate risk of a retaliatory spiral is lower than it was, but not altogether off the table. Trade tensions tend to affect global pricing flows and, more directly, expectations around inflation, growth, and supply chains. When we’re positioning into the first half of August, any sustained impasse or breakthrough – even a mild adjustment in tariff language – has the potential to move equity and fixed income volatility, particularly at the front end.
Market Alignment
In the meantime, markets are closely aligned to US economic indicators, starting with inflation data set for release imminently. As of this week, pricing in the Fed funds futures market suggests a low probability of any action at the next meeting but a much higher likelihood of a rate cut in September. This, of course, makes tomorrow’s Consumer Price Index report pivotal. Notably, the Federal Reserve has recently leaned more towards accommodation, but any upside surprise in CPI would complicate that direction.
We should be watching not just the headline reading, but especially the core figures – often less volatile and more telling of underlying inflation persistence. A surprise here could prompt a re-pricing of the September meeting odds, and by extension, money market curves that shape short-dated interest rate products. Of interest too is whether shelter inflation, which has been slowing inconsistently, begins to flatten out or re-accelerates.
Midweek sees more data on producer prices – often a less market-moving release but valuable for tracing margin pressures in upstream sectors. Then come Thursday’s retail sales and jobless claims reports. The latter serves as a real-time proxy for labour market health, which in turn fuels household consumption. If jobless claims stay low while retail sales skip expectations, assumptions around a soft landing or delayed policy easing could need revision. The opposite? That might reinforce the prevailing dovish tone without requiring much verbal accompaniment from the central bank.
So, going forward, the priority is to pin down inflation direction with more clarity and assess how soft or durable the labour market continues to be. Volatility is likely to re-emerge not necessarily on the events themselves, but on how they inform the path of short-term interest rates – and particularly whether market consensus swings more confidently in either direction for the remainder of Q3.
We’re adjusting implied volatility curves accordingly, keeping an eye on calendar spreads around September, and noting potential gamma risk around data releases with binary impact. The aim is to stay nimble. Broader risk appetite is driven by clarity, and clarity is in short supply in the current setting. Spreads, tenors and strike positioning should all be reviewed in light of immediate directional catalysts being event-driven and time-specific. In other words, don’t look away during CPI.
