News of the week summary - 03/08/2025

Trump announces new tariffs 

The White House has launched a sweeping new round of tariffs on dozens of trading partners, escalating global trade tensions and unsettling financial markets. President Donald Trump framed the move as part of his effort to reduce the US trade deficit and raise revenue to help fund domestic tax cuts. The result is the sharpest rise in America’s overall tariff rate in decades, shifting the world’s largest economy into a more confrontational era of trade policy.

Countries hit hardest include some of America’s closest allies and major suppliers. Tariffs on Canada were raised to 35%, India faces a 25% rate, and Switzerland 39%. Taiwan, a critical player in global supply chains and the world’s leading semiconductor exporter, will also incur steep new duties. In contrast, allies like the UK, the EU, and Japan managed to secure trade deals just before Trump’s August 1 deadline, sparing them from the harshest levies, though critics in those countries question what concessions were made. China, the world’s largest exporter, was excluded from this round, but faces a looming August 12 deadline to reach its own bilateral deal with Washington.

The economic logic behind the tariffs is twofold. First, the administration argues that persistent trade deficits, when the US imports more from a country than it exports to it, represent a national security and economic risk. Second, by taxing imports, the US government can collect additional revenue, which Trump has promised will help offset the cost of recent deep tax cuts. This reasoning reflects a shift from the traditional model of global trade, which for decades prioritized efficiency, open markets, and low costs for consumers, toward one centered on “fair and balanced” trade, as officials describe it.

Financial markets reacted swiftly. US stocks fell, with the S&P 500 down 1.1% and the Nasdaq losing 1.3%. European shares slid even more sharply, with the Stoxx 600 dropping 1.6%. These declines accelerated after weak US jobs data reinforced concerns that the economy is slowing just as tariffs risk pushing up costs for businesses and households. Investors fear that higher import duties could squeeze corporate profits, raise consumer prices, and ultimately drag global growth lower.

The structure of the tariffs reflects Trump’s strategy of rewarding or punishing countries based on their trade balance with the US. Partners that buy more from America than they sell face a relatively low 10% levy, while those running small surpluses face 15%. Larger surpluses, and the failure to negotiate a deal, mean higher tariffs, like those now applied to Canada and Switzerland.

The broader implication is that trade policy has become a tool not only for bargaining with rivals like China but also for reshaping America’s relationships with allies. For global businesses and investors, this shift creates heightened uncertainty: supply chains that have long been built around predictable, tariff-free trade are now vulnerable to sudden political shocks.

Opec+ ends production cuts, raising dears of oil glut

Opec+, the alliance of major oil-producing countries led by Saudi Arabia and Russia, has decided to reverse course and increase output by more than half a million barrels per day starting in September. This marks the end of its nearly two-year strategy of deliberately restricting supply to keep prices high. Analysts now warn that the added supply could tip the market into a glut, a situation where oil supply exceeds demand, pushing prices lower.

The earlier supply cuts, which removed about 2.2 million barrels per day from the market, were designed to counteract weak demand. Two main concerns drove this policy: the global transition toward electric vehicles (which reduces future oil consumption) and slower-than-expected demand growth in China, the world’s largest oil importer. By cutting supply, Opec+ hoped to prevent prices from falling too far, since lower prices hurt oil-dependent economies whose budgets rely heavily on petroleum revenues.

But the strategy did not deliver the intended results. Even with cuts, oil prices continued to drift lower, largely because demand remained subdued while production outside Opec+ surged. Countries like the United States, Canada, and Brazil expanded their output, seizing market share that Opec+ had voluntarily given up. In effect, Opec+ producers bore the cost of withholding barrels, while competitors filled the gap and profited. This imbalance created growing tensions within the group, with some members frustrated at losing revenue and market influence.

By now choosing to increase production, Opec+ is prioritizing market share over price stability. The problem, however, is timing: adding supply when demand is still weak risks flooding the market. An oil glut typically pushes prices down, which can benefit consumers and importing nations (through cheaper energy costs), but it squeezes producers’ revenues and can destabilize oil-exporting economies.

This move also illustrates the challenges Opec+ faces in today’s energy landscape. Unlike in the past, when coordinated cuts could reliably prop up prices, the rise of non-Opec producers and the accelerating energy transition limit the cartel’s control over the market. The group is now caught between two difficult choices: restrict supply and lose market share to rivals, or pump more oil and risk sending prices lower.

Weak job data fuels pressure on Fed to cut rates

Fresh labor market data has added to mounting calls for the Federal Reserve to lower interest rates, as hiring in the US slowed sharply over the past three months. According to the Bureau of Labor Statistics, the economy created only 73,000 jobs in July, while earlier figures for May and June were revised down by a combined 258,000. In total, the US added just 106,000 jobs from May to July, a steep drop compared to 380,000 in the previous quarter. The unemployment rate, however, remained unchanged at 4.2%.

Slower job creation is a sign that the economy is cooling. When businesses hire fewer workers, it usually reflects weaker demand for goods and services, since companies are less inclined to expand payrolls if consumers are spending less. This aligns with recent GDP data showing that consumer spending, which is the main driver of US growth, has softened in the first half of 2025.

President Donald Trump seized on the report to intensify his criticism of Fed Chair Jay Powell, accusing him of acting too slowly and again demanding interest rate cuts. The administration has argued that trade uncertainty and tariffs are temporary drags on the economy, but the weak numbers strengthen the case that tighter monetary policy (meaning high borrowing costs) is weighing too heavily on growth.

Markets reacted immediately. Yields on two-year US Treasuries, which closely track expectations for Fed policy, saw their sharpest drop in nearly a year, falling to 3.72%. A “yield” is the return investors demand to hold government bonds; when investors expect rate cuts, they buy bonds, which pushes yields lower. Futures markets, where traders bet on future interest rate moves, now price in a 90% chance of a rate cut at the Fed’s next meeting, up from less than half before the jobs data. Markets now expect two or three cuts by the end of 2025.

The dollar also weakened, falling 1% against a basket of major currencies, as lower interest rates make dollar-denominated assets less attractive to global investors.

For Powell and the Fed, the dilemma is delicate. On one hand, a slowing labor market suggests the economy needs support, which argues for cutting rates. On the other, the full impact of Trump’s new tariffs on inflation is still uncertain. Since tariffs can raise consumer prices, cutting rates too quickly could risk fueling inflation just as trade policies push costs higher.

Eurozone inflation holds at 2%

Eurozone inflation stayed at 2% in July, matching the European Central Bank’s (ECB) medium-term target and defying expectations of a slight decline. Economists had forecast inflation would edge down to 1.9%, but falling energy prices and a stronger euro kept overall price growth steady. This marks the second consecutive month that inflation has landed exactly at the ECB’s goal.

The ECB has already cut interest rates in half over the past year, from 4% to 2%, to support the economy after the sharp price shocks of 2021–2023. But at its July meeting it left rates unchanged, preferring to “wait and watch” as President Christine Lagarde put it, especially given the uncertainty surrounding Donald Trump’s escalating trade war.

The inflation picture is mixed. Core inflation, which strips out food and energy to better capture underlying price trends, remained stable at 2.3%. Services inflation, often seen as a measure of domestic cost pressures because it reflects wages and local demand, eased to 3.1%, its lowest level in more than three years. By contrast, lower oil prices (about $70 a barrel, 20% below a year ago) and a stronger euro (up more than 10% against the dollar since January) have kept imported goods cheaper, putting downward pressure on overall inflation.

Financial markets reacted cautiously. Traders still see only about a 45% chance of another ECB rate cut before year-end, suggesting that investors view inflation as being under control but not yet low enough to guarantee further easing. The euro rose more than 1% against the dollar following the data, helped by the simultaneous release of weaker US labor market figures.

The broader trend points to a gradual cooling of price pressures. Economists expect inflation in the bloc to average around 1.7% for the rest of the year as weak demand and the strong euro continue to suppress costs. For policymakers, the challenge is balancing that cooling momentum with the risks from global trade disruptions and uncertainty over growth.

Microsoft hits $4 Trillion valuation 

Microsoft’s valuation surged past $4 trillion this week, making it the second company after Nvidia to reach that milestone. The rally came on the heels of strong earnings from Microsoft and Meta, which reignited investor enthusiasm for artificial intelligence and pushed US equity markets to fresh record highs.

The Nasdaq rose as much as 1.6% before trimming gains, while the S&P 500 advanced 0.6%, even shrugging off a hawkish message from the Federal Reserve the previous day. Microsoft’s shares jumped as much as 9% in early trading before settling at a 4.5% gain. Meta climbed 12% on blockbuster quarterly results. Together with Nvidia, the two companies now account for a combined $5.9 trillion in market value, roughly twice the size of the entire UK stock market.

The surge highlights how investor focus within the “Magnificent Seven” US tech giants has narrowed into what analysts are calling an “AI trinity”: Microsoft, Meta, and Nvidia. These firms have led the charge in monetizing artificial intelligence, while other mega-cap tech names lag behind. The renewed earnings momentum has soothed fears of a looming stock market bubble, as strong profits help justify valuations that are at historic highs relative to revenues.

The context is striking. Just a few months ago, US tech stocks stumbled when China’s DeepSeek disrupted the market with a cheaper AI service, and again when President Trump’s reciprocal tariffs rattled investors. But the sector has rebounded strongly, with share prices breaking above pre-“liberation day” levels despite looming global trade levies that will push US tariffs to their highest since before the Second World War. Indeed, for many investors, the AI boom is strong enough to outweigh political uncertainty and signs of slower economic growth. 

IMF improves global growth forecast 

The International Monetary Fund (IMF) has revised its global growth outlook upward, suggesting that the economic damage from Donald Trump’s trade war may be less severe than initially feared. The Fund now projects global GDP growth at 3% in 2025 and 3.1% in 2026, compared with 2.8% and 3% in its April forecast.

The improvement reflects two main factors: a weaker dollar and less severe tariffs than expected. The effective tariff rate on US imports is now estimated at 17%, lower than the 24% figure assumed in April. This easing means global trade has faced less disruption than initially anticipated. Additionally, many companies “frontloaded” imports, accelerating purchases before tariffs took effect, temporarily boosting activity. However, the IMF warned that such stockpiling could amplify vulnerabilities if new shocks occur.

A significant driver of resilience has been the US dollar’s nearly 9% decline against major currencies this year. Since much of the world’s corporate and government debt is denominated in dollars, a weaker greenback reduces repayment burdens and lowers global financial stress. 

The US and China both received growth upgrades, while the UK is forecast to be the third-fastest growing G7 economy in 2025, after the US and Canada. Still, the new outlook remains below pre-pandemic averages: global growth was 3.3% in 2024, compared to a pre-COVID norm of around 3.7%.