Investment Viewpoint: resilient US economic data amid tariff uncertainty

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Markets and macro insights with Bernard Swords, Chief Investment Officer

How did markets fare last week?

• It was another positive week for equity markets. Factors influencing the trend were the resilient US economic data, good news from the AI sector, and a retreat by President Trump from intimations that he may remove Federal Reserve Chair Powell.

• World equities are up 0.7% in local currency terms. Due to a slight recovery in the US dollar, this means 1.0% in euro terms. Asia Pacific and the US were the strongest regions, while the euro area lagged somewhat behind.

What were the factors at play?

• An improved profit outlook from TSMC, the world’s largest semiconductor manufacturer, (based in Taiwan) reinforced Asia-Pacific market performance. TSMC noted stronger than expected growth for its high-end product, indicating the continuation of worldwide company investment in AI capabilities. As a result of this development, IT proved to be the strongest sector last week.

• Industrials were also strong, buoyed by improved US economic data as well as increased capital investment in the AI space. News stories about President Trump seeking a pretext to remove Chair Powell did cause a tremor in markets, but a denial from the President produced a sharp rally. Nevertheless, the fluctuation shows investor nervousness about standards of government and competence in the present US administration.

What can we expect in the short term?

• The results season will continue to reinforce the strong performance of equity markets, although tariff policy will loom large as we approach the deadline of August 1. To date, the news flow suggests a significant modification of the more drastic threats associated with the policy; this may yet alter as July draws to a close.

• Taking all eventualities into account however, Goodbody would view any falls in equity prices as potential opportunities rather than as risks to be forestalled.

What data is reinforcing market strength?

• Data from the US was dominated by the inflation and retail sales reports. Neither give any cause for concern. Core inflation in the US was 0.2% month-on-month and 2.9% year-on-year. Core goods did move back into positive territory, and this tendency could be registering the impact of tariffs that have already implemented.

• Tariffs will exert an even greater impact in the coming months; the question remains as to whether they will trigger second-round and hence persistent consequences.

What further good news influenced market performance?

• The Retail Sales report showed a positive development. Core Retail Sales rose 0.5% month-on-month and 4.0% year-on-year. We expect this to slow as tariff increases make themselves felt from August onwards.

• It is also unclear how much current demand is driven by anticipation of imminent tariffs. That said, stronger demand was discernible across all product groups and not only those vulnerable to tariffs.

What other data was relevant to the overall picture?

• Chinese Gross Domestic Product growth in the second quarter proved somewhat better than expected at 5.2% year-on-year and 1.1% quarter-on-quarter. There was a decline in momentum as the end of the quarter approached, with retail sales growth slowing from 6.4% year-on-year in May to 4.8% in June. The industrial sector showed the most positive results, but it may have been artificially buoyed by pre-tariff buying.

What was the situation in the euro area?

• The industrial sector in the euro area also showed a strong performance, with industrial production rising 1.7% month-on-month in May, above consensus expectations of 1%. The rise is partly caused by a surge in Irish industrial production. Even if that factor is left out of account however, European industrial production was still up 0.5% month-on-month. In regard to Ireland and to Europe as a whole, the question remains as to how much increased production has been driven by pre-emption of impending tariffs.

The week ahead: what to watch out for

This week’s most important event will be the meeting of the Governing Council of the European Central Bank on July 24. The main data releases will be sentiment surveys. From the US and Europe, we will receive the main business surveys (the Purchasing Managers’ Index). Consumer sentiment surveys will also be issued in the euro area.