Why Wall Street is calm despite Trump’s August tariff tantrum?

 

·         Fine prints of import data show actual effective tariffs of ~6% vs earlier 3% in H1CY25; thus, it’s not showing big in the US inflation data.

·         The market believes that Trump will soon withdraw Fentanyl and reciprocal tariffs on China and the EU, scaling back tariffs to 10% base levels.

·         The effective weighted average tariffs on Mexican and Canadian goods are now ~13.75% and 9.50% despite the big Trump tariff headline.

·         Overall, Trump may keep average effective rates ~!0% for EU, China, Mexico, and Canada-contributing ~60% of US imports.

·         If Trump keeps ~20% average tariffs on rest 40% from rest of the world, overall effective tariffs may be ~15% vs 3% prior, which may not be a big issue.

On Monday (July 15, 2025), apart from the ongoing Trump tariff tantrum, some focus of the market was also on U.S. inflation data for June. The US CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, such as food, transportation, and shelter. Core CPI excludes the volatile food and energy categories to provide a clearer view of underlying inflation trends.

On July 15, the BLS data (NSA) showed the annual (y/y) US core CPI inflation rose at 2.9% in June against 2.8% sequentially and below the median market expectations of 3.0%. The US core CPI inflation was unchanged at 2.8% for the last three months, at a 4-years low since March 2025 against pre-COVID December’2019 of 2.3%, the real Fed target for core CPI inflation. The 3MRA (three-month rolling average) of US core CPI was 2.8% in June’25, against 3.4% yearly (y/y) and still slightly above December’19 pre-COVID 3MRA of 2.3% and the Fed’s price stability targets for core CPI levels of 2.3%; i.e. Fed needs to bring down core CPI inflation to the least 2.3% on a sustainable basis from present average of 2.8% to achieve its price stability targets.

US CORE CPI INFLATION (Y/Y)

Overall, the average US core CPI was at 3.0% in 2025 (YTM), against 3.4% in 2024, and 2.0% in 2019. The US core CPI has increased 22.3% cumulatively from January’19 to May’25.

On Wednesday, the BLS data (SA) also shows the sequential (m/m) US core CPI rose 0.2% in June’25 from 0.1% in the preceding month and below the market expectations of 0.3%. Overall, the 2025 average (YTM) 2024 average was 0.2% against 0.3% in 2024, and 0.1% in 2019 (pre-COVID).

In June’25, the BLS data shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) rose at 2.2% from 1.9% in the prior two months compared to 1.7% in pre-COVID (Dec’19) times.

On July 15, the BLS data (NSA) also shows the annual (y/y) US total CPI inflation surged 2.7% in June’25 from 2.4% sequentially, in line with the median forecasts of 2.7% and the highest since Feb’25. The US food inflation edged up to 3.0% from 2.9% sequentially, while energy inflation fell by -0.8%% in June against -3.5% sequentially. The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%, and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

Overall, the 3MRA of US CPI inflation was 2.4% in June’25 vs 3.2% yearly. The 2025-average US CPI was 2.6% in June (YTM) vs 3.0% in 2024 and 2.3% in 2019 (pre-COVID); officially, the US Congress has given the Fed a price stability mandate of 2.0% CPI inflation on a sustainable basis, not core CPI or core PCE, and even total PCE inflation.

On June 15, the BLS data (SA) shows the sequential (m/m) US CPI surged to 0.3% in June’25 from 0.1% in the prior month, in line with the median market expectations of +0.3% and the highest since Feb’25.

The 3MRA of sequential CPI was 0.2% in May’25.

Overall, even if we assume a 0.2% sequential core CPI rate for the next few months on average, the 12-month (y/y) core CPI rate would be around 3.0% on average. But, the sequential core CPI rate may be around 0.2-0.3% in H2CY25 as the US core inflation may have bottomed in H1CY26 and the effect of Trump tariffs would be visible in the coming months. Frontloaded US imported goods may have been replenished by May-June 25.

Muted Inflation Metrics: As of June 2025, CPI rose to 2.7% annually, up from 2.4% in May, showing early signs of tariff effects. However, core inflation (excluding volatile food and energy) remained at 2.8%, and overall inflation stayed below economists’ dire predictions. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred gauge, rose to 2.3% in May, only modestly above the 2% target. These figures suggest tariffs are starting to bite (e.g., on furniture and clothing), but broader disinflation in other sectors has kept overall inflation in check. But US disinflation may be bottoming out.

Why US core CPI inflation still low despite some Trump tariffs being effective from April’25?

The US collected ~$93.6B tariffs from Dec’24 to June’25 on ~$1610B imports; this translates into an effective weighted average tariff rate of around 3.6% (~5.8%) against a 10% basic/universal rate and 25% sectoral tariffs on metals. If we adjust ~3.0% as earlier (pre-Trump 2.0) normal tariffs, the net increase in tariffs is only around 3.0%, which may be equally borne by US importers, consumers and also global exporters @1% each. Even if global exporters didn’t share any Trump tariff burden, 3% additional tariffs are not a big issue for importers/retailers as it would be partly adjusted by a higher USD in general, coupled with smuggling/corruption at customs checkpoints. Various US importers may also avoid higher tariffs by docking imported goods first at tariff tariff-free CTZ/SEZ location and then redirecting the same to the US after repackaging/assembling.

The effect of Trump’s tariffs on US inflation data is not yet fully visible for several other reasons, also based on available evidence:

Delayed Pass-Through to Consumers

·         Businesses have been absorbing some tariff costs or delaying price increases to avoid alienating customers. Many companies stockpiled goods before tariffs took effect, allowing them to sell pre-tariff inventory at lower prices. This delays the impact on consumer prices; tariff-driven price increases may take 3-6 months to appear in CPI data. For example, during Trump’s first term, tariffs on washing machines in January 2018 didn’t raise appliance prices until April.

·         Inventory Stockpiling and Front-Loading: Importers and retailers preemptively imported large volumes of goods before tariffs were imposed, particularly in early 2025. This front-loading reduced the immediate need to pass on higher costs, as existing inventory was purchased at pre-tariff rates.

·         Selective Price Increases: While some goods like toys, car parts, and appliances have seen price increases (e.g., orange prices rose 3.5% from May to June 2025), declines in other areas like gasoline, airfares, and clothing have offset these in overall inflation metrics. Housing-related costs, not tariffs, were the primary driver of April 2025 inflation, accounting for over half the monthly increase. Rent disinflation gathers primarily for Trump’s Trump’s anti-immigration and mass deportation policies.

·         Business Strategies to Mitigate Costs: Companies are using strategies like absorbing tariff costs, leveraging loopholes, or delaying imports to minimize price hikes. Some firms, wary of losing market share, are cautious about immediate price increases in a market where consumers are sensitive to inflation post-COVID.

·         Tariff Policy Uncertainty and Suspensions: Trump’s tariff implementations have been erratic, with some announced tariffs (e.g., on 57 countries planned for April 9, 2025) paused for 90 days to allow negotiations. This uncertainty has led businesses to hold off on price adjustments, expecting potential reversals or trade deals. A temporary truce with China in June 2025 also reduced immediate inflationary pressure.

·         FX adjustments: Some Trump administration officials, like Kevin Hassett, argue that foreign producers are absorbing tariff costs to maintain market share, reducing the impact on US prices. While this claim is debated, it aligns with reports that prices of imported goods fell between December 2024 and May 2025, possibly due to competitive pressures or currency adjustments (e.g., a weakened Chinese yuan).

If Trump implements his August 1 tariffs narrative, then the weighted average tariffs would be around 25% and should reflect in inflation data from October-December’25. Thus, Powell/Fed is seeking clarity about Trump tariffs and is in wait & watch mode. Powell is right!

Despite these factors, the full impact of Trump tariffs is likely forthcoming; tariffs could add 50-100 bps to inflation by December 2025-26, and significant long-term economic costs, including higher cost of living, particularly if new tariffs are implemented after July 2025 or later from January 2026. The Trump administration is projecting ~ $300B yearly tariffs collection from around $3000B merchandise imports per year on average. This is equivalent to a 10% weighted average US tariffs rate for the longer term against ~3% prior as the best case scenario.

Conclusions

Trump is using his reciprocal tariff rhetoric as an effective negotiation tool to offshore global manufacturing intended for US goods in the US and also to get better trade deals with the rest of the world, ensuring free & fair access of US products. Trump may also withdraw Fentanyl tariffs of 20% on China for significant progress on the prevention issue.

Unlike April, Wall Street is relatively calm this time despite Trump's August tariff threats, as the fine print shows net effective average tariffs ~25% vs earlier 28%. And Trump may soon withdraw the Fentanyl levy of 20% on China and reciprocal tariffs of 20% on the EU to bring 10% basic tariffs for both. Trump's effective tariffs on Canada would be ~9.50% and Mexico ~13.75% after adjusting USMCA compliant goods at 0% and Canadian energy & Potash at10%-far lower than the headline suggests; only 10% Canadian goods are facing higher tariffs of 60% and ~25% Mexican goods are facing 55% tariffs. EU, China, Mexico and Canada together contribute ~60% of US imports.

Even if Trump continues his higher reciprocal tariffs ~20% on average, the net weighted average US tariffs would be around 15% including 25% sectoral tariffs on metals, automobiles, chips and potential pharmaceuticals. Thus, if we adjust ~3% pre-Trump 2.0 era average tariffs, the net increase of US tariffs may be around 12%, which could be borne equally ~4% by all the concerned stakeholders; i.e., US importers/retailers/producers, US consumers and also may be by global exporters to retain their US market share. Underlying currency (FX) adjustments may also absorb the full net impact alone; e.g., USDCNY is now hovering around 7.00-7.15 and may easily go around 7.35-7.50 in the coming months equivalent to 4-5% additional; Trump tariffs cost adjustments.

But this narrative holds good as long as Trump keeps his final tariffs within a reasonable range without affecting economic activities too much. And Trump also has to finalize his tariffs strategy/trajectory for the Fed to understand the overall impact on the economy, including inflation and employment.

Weekly Technical outlook: DJ-30, NQ-100, SPX-500 and Gold

Looking ahead, whatever may be the narrative, technically Dow Future (CMP: 44800) now has to sustain over 45000 for a further rally towards 45300*/45800* and only sustaining above 45800, may further rally to 46100/46500-47100/47200 in the coming days; otherwise sustaining below 44950, DJ-30 may again fall to 44200/43900-43400/42400 and 41700/41200-40700/39900 in the coming days.

Similarly, NQ-100 Future (23000) now has to sustain over 23100 for a further rally to 23300*/23600-23800/24000 and 24100/24450-24700/25000 in the coming days; otherwise, sustaining below 22900, NQ-100 may again fall to 2400/22200-21900/20900-20700/20200 and 19890/18300-17400/16400in the coming days.

Looking ahead, whatever may be the fundamental narrative, technically SPX-500 (CMP: 6300) now has to sustain over 6450 for a further rally to 6525/7000-7500/8300 in the coming days; otherwise, sustaining below 6375/6300-6250/6200, SPX-500may again fall to 6000/5800-5600/5300 in the coming days.

Technically Gold (CMP: 3350) has to sustain over 3375-3395 for a further rally to 3405/3425*-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3365-3360, Gold may again fall to 3340/3320-3300*/3280 and 3255*/3225*-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.

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