Stocks instead took the as confirmation that September is shaping up to be the long-anticipated “insurance cut” in an economy still treading water above the break-even line.
Tuesday’s market action felt like a lesson in pure “risk-on” trading — the kind you read about in textbooks but rarely see play out in real life. A benign US CPI print slid into an already bullish equity backdrop, and economists still warning of inflation next month were met with the market’s equivalent of a shrug. Traders took the number as a green light, signaling that September could deliver the long-awaited “insurance cut” while the economy continues to hover just above the break-even line.
From New York to Frankfurt to Tokyo, equities lit up the board. The and notched fresh record closes — 6,445.76 (+1.13%) and 21,681.90 (+1.39%), respectively — while the added a cool 483 points. Small caps staged their own jailbreak, with the ’s rally nearly triple the S&P’s gain as traders salivated over the prospect of cheaper short-term money.
Even the notoriously twitchy bond market played along, with sliding four basis points to 3.73% as futures markets pumped the odds of a to 94%, up from 85% before the data.
The details were Goldilocks in high resolution: headline up 2.7% YoY vs. 2.8% expected; up 3.1% vs. 3.0% forecast. Not hot enough to keep the Fed in a “higher for longer” pause — just enough rope to give Powell and company political cover to trim rates.
With the Fed still steering by the stars of incoming data, inflation’s sitting in the backseat, calm and buckled in, while the labour market’s starting to limp on one leg. Those downward payroll revisions? That’s the canary coughing in the coal mine. Tuesday’s print doesn’t just nudge the narrative toward a September “insurance” cut — it paints a neon arrow pointing at 25bp, and keeps a side door ajar for a full 50bp if the jobs tape keeps unravelling. Right now, the constellations are lining up — but they’re doing it under a sky that could turn stormy fast.
Tariff pass-through fears never even made it onto the trading blotter. The CPI print was as flat as a calm harbour, proof that corporates and exporters are still eating the tariff bill like a bad lunch just to keep goods moving. That buys them some time, but margin erosion is a slow bleed — and every slow bleed eventually turns into a gusher. At some point, the dam’s going to crack, and when it does, the floodwaters of higher prices will rush downstream. The only mystery left is how big the wave will be when it hits the consumer shore.
In bonds, the curve twisted into a mild steepener. Front-end yields sank on rate-cut fever, but the long end inched higher, with the climbing before the fiscal numbers even hit the tape. July’s U.S. deficit printed at $291bn, with customs duties raking in $27bn — nearly quadruple June’s take — proof the tariff cash machine is humming, even if it hasn’t yet filtered into CPI.
From the rates desk, the message is clear: the front end is betting big on cuts, while the back end still sees fiscal strain as a yield floor. For dollar bulls, that’s hardly an inspiring vista — it’s like trying to drive uphill with the parking brake half on. The front-end softness undermines carry appeal, while the back end’s reluctance to rally keeps foreign inflows tepid. In other words, you’re left with a greenback caught in the downdraft of a Fed eager to ease and a bond market whispering that deficits and long-end supply will continue to haunt.
Europe joined the party, with Bund 30-year yields hitting their highest since 2011 and the 10s30s spread pushing toward cycle highs at 55bp. German fiscal expansion and Dutch pension reforms remain slow-burn drivers for long-end EUR rates, leaving more room for steepening if global long-end bearishness spills over.
For now, it’s champagne and confetti — the market treating a September cut as a done deal. But under the glitter, the bond market’s split personality and creeping margin erosion remind us that even a Goldilocks script can flip to a cautionary tale when the credits roll.
US Deficit Swells in July as Tariff Gains Vanish in a Flood of Spending
If the U.S. fiscal ship was the Titanic, July’s Monthly Treasury Statement was the sound of the hull grinding harder against the iceberg. For a few fleeting months, Washington’s newfound tariff haul had given the illusion of course correction — a fresh revenue stream, peaking near $20B a month, that looked like it might plug a few holes. But in July, that patch was ripped away by a wave of government outlays so large it made tariff receipts look like coins tossed into the ocean.
Here’s the scorecard: Washington burned through $630B in July — up 9.7% from a year ago and the second-highest monthly spend since January. Revenue limped in at $338B, just 2.5% above last year, and that’s with $19.3B in tariff money juicing the number. Strip that out, and the year-on-year income actually shrinks.
The result? A July deficit of $291B — a cliff dive from June’s brief $27B surplus and a 20% jump from last July’s $243B shortfall. It’s also the second-worst July in U.S. history, outdone only by the COVID-era spending binge. On a fiscal year-to-date basis, the red ink has already hit $1.629T with two months to go — up 7.4% from last year and pacing toward the third-largest annual deficit ever recorded, trailing only 2020 and 2021.
But the real fiscal death spiral is happening in the interest expense line. Uncle Sam shelled out $91.9B in July alone to service the debt, bringing the 10-month total to a record $1.019T and on track to top $1.2T for the year. Interest is now the second-largest line item in the federal budget — bigger than defense, income security, or healthcare — with only Social Security ahead. And at this trajectory, even that ranking may not hold for long.
For all the noise about tariff revenue, the truth is brutal: the government’s spending engine is running wide open, the interest tab is compounding like a payday loan, and the deficit math is spiraling in a way that makes even the bond market’s most hardened bears twitch. Tariffs may have bought a few months of narrative relief, but July proved they’re just ballast on a ship still steaming full speed toward fiscal trouble.