Trump’s tariff policy creates new inflationary threats. The Bank of Canada is likely to maintain its hawkish stance at the next meeting

At the end of Tuesday, the Dow Jones (US30) Index fell by 0.98%. The S&P 500 (US500) Index fell by 0.40%. The Nasdaq (US100) Technology Index closed lower by 0.13%. Investors digested June inflation data, the latest earnings reports from major banks, and news that Nvidia may resume chip sales to China. The Consumer Price Index for June rose by 0.3% month-on-month and 2.7% year-on-year, heightening concerns that President Trump’s planned 30% tariffs on the EU and Mexico could push inflation higher. The CPI report raised concerns that tariff-driven price pressures are beginning to emerge. Shares of Wells Fargo (-5.5%) and JPMorgan (-0.9%) fell after mixed results, while Citigroup bucked the trend, rising 3.8% on strong results and a share buyback plan. As earnings season gathers momentum, Wall Street remains cautious as S&P 500 earnings growth expectations remain low and uncertainty about future Fed policy grows amid trade and inflation risks.

The Canadian dollar strengthened to 1.37 per US dollar as investors balanced rising domestic inflation with the recent softness of the US currency. Canada’s Core Consumer Price Index, the preferred measure of underlying inflation, remained unchanged at 3% in June, reinforcing expectations that the Bank of Canada will maintain its hawkish stance and keep its overnight rate at 2.75% rather than prematurely easing.

European stock markets were mostly down yesterday. The German DAX (DE40) fell by 0.42%, the French CAC 40 (FR40) closed down 0.54%, the Spanish IBEX35 (ES35) fell by 1.15%, and the British FTSE 100 (UK100) closed down 0.66%. On Tuesday, European stock indices lost their early gains and closed mostly lower as markets continued to assess how potential US tariffs could affect European businesses. US President Trump had earlier announced the introduction of 30% tariffs on imports from the European Union from August 1, prompting the bloc to continue its search for a trade agreement. EU officials recently said that negotiations on an agreement to avoid tariffs are continuing, but in any case, a retaliatory package is being prepared that could impose tariffs on US goods worth up to €72 billion.

WTI oil prices fell below $67 a barrel on Tuesday after dropping 2.2% in the previous session, as traders became skeptical that President Trump’s new campaign to pressure Russia would significantly disrupt its oil exports. Trump increased military aid to Ukraine and warned of imposing 100% tariffs if a peace agreement was not reached within 50 days, which was perceived as a threat to impose secondary sanctions on major buyers of Russian oil, such as India and China. However, markets viewed the 50-day delay as a reduction in the risk of immediate supply disruptions. Nevertheless, China provided some support, with refinery activity reaching 15.2 million barrels per day in June, the highest level since September 2023.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) rose by 0.55%, the Chinese FTSE China A50 (CHA50) fell by 0.40%, the Hong Kong Hang Seng (HK50) added 1.60%, and the Australian ASX 200 (AU200) showed a positive result of 0.70%.

On Wednesday, the New Zealand dollar traded around $0.594, close to its lowest level in more than three weeks, due to the strengthening of the US dollar. The US dollar strengthened after consumer inflation in the US rose in June, prompting traders to reduce bets on Federal Reserve rate cuts in the coming months. The kiwi also reacted to better-than-expected second-quarter GDP data from China, New Zealand’s largest trading partner.

The Australian dollar strengthened to $0.653 on Wednesday, ending a three-day losing streak, as investors turned their attention to Thursday’s labor market data, which could provide new insight into the near-term policy outlook. The Reserve Bank of Australia (RBA) has recently taken a cautious stance, focusing on data, citing a more balanced inflation outlook and continued labor market strength. A strong jobs report could cast doubt on the 80% probability of a rate cut at next month’s meeting, as predicted by the market. Markets currently expect an increase of 20,000 jobs in June and an unchanged unemployment rate of 4.1%.

On Tuesday, US President Donald Trump announced the conclusion of a trade agreement with Indonesia, which includes key procurement commitments that will help the country avoid tougher tariffs. Indonesian goods will now be subject to tariffs of 19%, compared to the 32% he had previously threatened.