Monday marked the end of a volatile quarter in financial markets. After a 25% peak-to-trough decline from February to April, the S&P 500 has fully recovered, reaching new record highs (Chart 1). The 90-day pause on “Liberation Day” tariffs, a tentative truce with China, signs of economic resilience, and limited tariff pass-through to consumer prices thus far have helped to fuel the recovery.

However, uncertainty looms with the pause on the “Liberation Day” tariffs set to expire next week. President Trump has signalled a firm stance on the July 9th deadline, and recently threatened higher tariffs on Japanese imports. Lingering uncertainty on Section 232 tariffs — affecting lumber, copper, pharmaceuticals, and critical minerals — will further complicate matters. Trump recently halted trade talks with Canada, before resuming them when Canada canceled its Digital Service Tax. President Trump did announce a framework trade deal with Vietnam on social media. The U.S. will impose 20% tariffs on imports from the Vietnam and a 40% levy on any goods that are “transshipped” via this country in order to prevent Chinese goods from entering the U.S. via backdoor routes. So far, the UK and Vietnam are the only countries to get deals ahead of the deadline. 

Domestically, the U.S. economy has shown resilience, but recent data revisions suggest it may not be as robust as initially believed. Q1 consumer spending growth was downgraded to 0.5% annualized, down from 1.2%. Spending is tracking weaker than forecast for the second quarter. Consumer spending slowed in April and declined in May, with much of the softness stemming from goods, which saw front-loaded demand ahead of tariffs. Auto sales declined for the third straight month in June, adding downside risk to activity. Services spending has also been lackluster, rising just 0.1% in April and remaining flat in May. 

The labor market has been a relative bright spot, but is also showing signs of strain. Slowing immigration and weak population growth may be encouraging employers to hold onto workers, limiting layoffs — the unemployment rate remained little changed. June payrolls rose by 147k—above the 110k consensus—but gains were heavily concentrated in state and local government (+74k) and healthcare & social assistance (+60k). Excluding these two non-cyclical sectors, employment was nearly flat, suggesting continued private-sector hesitation (Chart 2).

ISM survey data also points to modest economic activity. Both the manufacturing and services indices improved slightly in June, but remained at low levels. Manufacturing remained in contraction, while services returned to expansion after a brief dip in May. Price pressures persisted in both sectors, especially for manufacturers, where input costs continue to rise. Employment subcomponents fell further into contraction, signaling reluctance to expand payrolls.

Overall, this week’s data is unlikely to shift the Fed from its patient stance. Activity is softening, but not collapsing. We share the market’s view that the Fed will likely keep monitoring inflation developments before making any policy moves, with September remaining the most likely decision point.