US Inflation in Focus, but Trump’s Tariffs Could be the True Market Mover

Markets are bracing for what could be a volatile session as investors digest critical US inflation data while keeping a close watch on potential tariff announcements from President Trump. The highly anticipated Consumer Price Index (CPI) report will set the tone for Federal Reserve policy expectations, but the looming possibility of sweeping trade measures could overshadow economic data.

The confluence of these two factors—monetary policy uncertainty and trade protectionism—poses a challenge for investors seeking clarity on the future trajectory of markets. While inflation readings will provide insight into whether the Fed remains on hold, any escalation in trade tensions could have far-reaching consequences, particularly for equities, currency markets, and commodities.

CPI Report: How Inflation Could Shape Fed Policy

The US inflation report remains a critical focal point for traders. A higher-than-expected print would likely reinforce the Fed’s cautious stance on rate cuts, potentially pushing expectations for monetary easing further into the future. Conversely, any signs of cooling inflation could rekindle speculation that the central bank may lower rates sooner rather than later.

As it stands, markets are pricing in roughly 35 basis points of rate cuts for the year, with the first cut now expected in September rather than July. This shift in sentiment has been largely driven by uncertainty surrounding Trump’s recent tariff threats, which have clouded the economic outlook.

- Core CPI and Fed’s Dilemma: If the core inflation figure remains stubbornly high, the Fed may be forced to maintain its current policy stance longer than anticipated. With Trump’s economic policies increasingly erratic, policymakers may opt for a wait-and-see approach before committing to any rate changes.

- Impact on Treasury Yields: US Treasury yields have already moved higher in anticipation of the inflation report, indicating that bond investors are expecting a relatively firm reading on price pressures. The 10-year yield has climbed to 4.54%, reflecting the market’s view that the Fed’s easing cycle is far from imminent.

Trump’s Trade Gambit: A Delayed but Looming Threat

While inflation remains a top priority for market participants, the biggest wildcard could be Trump’s long-promised “reciprocal” tariffs. The president had initially suggested that he would make an announcement on Tuesday or Wednesday, but as of now, no formal details have been released. When pressed for a timeline, Trump simply responded with “we’ll see”, adding another layer of uncertainty to the equation.

The delay could be interpreted in multiple ways:

1. Strategic Timing: Trump’s aides may be working behind the scenes to fine-tune the policy details, ensuring that the new trade restrictions do not require Congressional approval. If this is the case, the delay may be a temporary pause before a major policy announcement.

2. Testing Market Sentiment: The administration could be gauging investor reactions before moving forward with more aggressive tariffs. If markets continue to hold up well, Trump may feel emboldened to proceed with stricter trade measures.

3. Diplomatic Backchannels: Given the geopolitical risks, Trump’s team may be engaged in last-minute negotiations with key trading partners to soften the impact of the tariffs or extract concessions.

Regardless of the rationale, the market remains on edge. Historically, delays in major policy announcements have often invited speculative buying, as traders bet that an absence of bad news is, in effect, good news. However, this creates the risk of complacency—should Trump proceed with harsh trade measures, markets could be caught off guard.

Market Reactions: A Mixed Bag Across Asset Classes

The interplay between inflation expectations, Fed policy, and trade uncertainty is generating diverse reactions across asset classes:

Equities: Resilient but Vulnerable

Despite ongoing concerns about tariffs, US equities have shown remarkable resilience. While tech stocks underperformed in the previous session, the broader market has yet to exhibit any meaningful signs of distress. This suggests that investors remain in a buy-the-dip mentality, confident that corporate earnings strength and economic momentum will outweigh policy risks.

- Key Watchpoint: If Trump delivers a tariff announcement later this week, we could see a more pronounced reaction in trade-sensitive sectors such as industrials, semiconductors, and consumer goods.

Treasuries: Yields Climb as Rate Cut Bets Fade

The Treasury market has been under pressure, with yields pushing higher ahead of the CPI release. The 2-year yield now stands at 4.29%, while the 10-year yield has risen to 4.54%. This suggests that investors are reassessing the likelihood of near-term rate cuts, as inflationary pressures and trade policy uncertainty complicate the Fed’s path forward.

US Dollar: Strength Against Yen, Weakness Elsewhere

The US dollar is experiencing mixed performance, with the USD/JPY pair rising for a third straight session, up 0.8% to 153.65. The move suggests that traders are favoring the dollar against the yen, likely due to diverging monetary policies between the Bank of Japan and the Federal Reserve. However, the greenback has struggled against the euro and British pound, as European currencies found some support from their own central bank policy signals.

- Key Watchpoint: If inflation comes in stronger than expected, the dollar could see renewed upside as traders adjust Fed rate cut expectations.

Gold: Losing Momentum Amid Uncertainty

Gold’s spectacular rally appears to be pausing, with prices pulling back to $2,884. The metal has been one of the best-performing assets in recent months, driven by inflation concerns, geopolitical instability, and central bank buying.

- Key Support Levels: The 100-hour moving average at $2,882 and the 200-hour moving average at $2,850 will be crucial technical levels to watch. A break below these levels could signal a deeper retracement in gold prices.

Outlook: The Calm Before the Storm?

As markets digest the latest developments, the overarching theme remains one of cautious optimism tempered by looming risks.

1. If the CPI report shows cooling inflation, expectations for a September rate cut may gain traction, providing a boost to equities and bonds.

2. If Trump holds off on new tariff announcements, markets may continue their risk-on rally, benefiting cyclical stocks and emerging markets.

3. However, if inflation surprises to the upside and Trump follows through with aggressive trade measures, volatility could spike across asset classes.

For now, the absence of a tariff announcement has been a positive for risk sentiment, but that could change in an instant. Investors would be wise to remain vigilant, as markets have a tendency to underestimate the potential impact of trade disruptions.

While today’s CPI data will undoubtedly shape Fed policy expectations, the true market-moving event may ultimately come from the White House. Until clarity emerges on tariffs, market stability could be nothing more than a temporary illusion.