Logic Monday Espresso Podcast

Monday Espresso Podcast - 7th July 2025

[00:00:00] Nathan Sweeney: Good morning everybody. It is Monday the 7th of July. Hard to believe. So we're past the halfway points, and actually given all the news, not a bad outcome so far, but let's focus on how markets were performing last week. And if we look at equities was actually quite a positive week. So we had US equities up over 2%.

[00:00:20] Nathan Sweeney: And if we look at UK equities, they're broadly flat for the week. And Europe is off just slightly for the week, but good innings across the board. But there was a lot of news. I'm gonna bring James in on this, so morning James.

[00:00:35] James Athey: Hi Nathan. Good to be back. Thank you for having me. As always.

[00:00:38] Nathan Sweeney: Always great to have you on the show.

[00:00:39] Nathan Sweeney: But you know, we did have a lot of news on the trade and tariff front last week and kind of at the very beginning of the week. So we had, Canada was obviously looking to implement tax on digital services. So this is the US tech companies and then. Trump hit back by saying, Hey, look, we're gonna cancel these discussions on trade.

[00:00:58] Nathan Sweeney: And then obviously we had a rollback from Canada over the weekend. And then the trade deals are back on, but it just shows you how quickly things can move in markets on the trade front.

[00:01:07] James Athey: Yeah, I mean, absolutely. We've had this to and fro whereby certain countries were deemed to be real losers from Donald Trump's policies and others were deemed to be winners and you roll the clock forward a month and suddenly the winners look like losers and vice versa.

[00:01:21] James Athey: Definitely Canada is a story that's ebbed and flowed. I'd also point to Japan where it was, felt like that alliance was just much closer in political terms and a trade deal would possibly be easier to get to. Actually, we've seen the opposite where it seems that there's a real sticking point around autos and it feels like Japan is drifting quite quickly into the potential losers column from Trump's trade policies.

[00:01:43] James Athey: But, the history is yet to be written on this stuff, so I wouldn't feel certain about any particular outcome just yet.

[00:01:51] Nathan Sweeney: So then the big news on the tariff front this week was obviously the agreement with Vietnam. So what's your take on the Vietnam deal?

[00:01:59] James Athey: I mean, it's obviously not hugely significant for the US economy.

[00:02:03] James Athey: Trade with Vietnam, you know, is not economically that significant. It's interesting because what we did see back in 2018, when Trumps first started really implementing tariffs specifically against China, there was almost a one for one relationship between the drop in exports from China to the US versus the increase in exports from Vietnam to the US.

[00:02:28] James Athey: So it's quite obvious that goods were merely being rerouted to avoid tariffs. The trade deal that's been agreed explicitly tries to take account of that. So there is a 20% tariff rate for Vietnam exporting to the US. There is a 40% tariff rate if they are deemed to be goods, which have been rerouted through Vietnam.

[00:02:46] James Athey: So Trump will trumpet this as a huge success. I don't think it's really anything of the sort, but it does show that deals still are being done, can be done, and in many cases they are gonna be done in the favour, shall we say.

[00:03:00] Nathan Sweeney: And I think that's a real interesting view point you make there just about the rerouting of goods.

[00:03:04] Nathan Sweeney: And it is estimated that about 150 billion of goods were rerouted in 2023. So it's not an insignificant number. And you have to remember that there's lots of different activities that take place, like mislabeling the goods or under invoicing the goods. So these are just some of the ways that some of the exporters look to kind of get around these tariffs.

[00:03:24] Nathan Sweeney: So I suppose the implication there is that. Will we see the impact on inflation that people think we'll see as a result of these tariffs?

[00:03:32] James Athey: Yeah, and that's always for us, been a bigger and more open question than maybe some of our listeners would've interpreted from a lot of the commentary. You know, it was very easy to simply say that tariffs will increase prices in the US and a lot of commentators were saying the entire burden of tariffs will fall on the US consumer.

[00:03:50] James Athey: We were always a little less certain of that outcome. It's abundantly the case. That the impact of tariffs can be diffuse throughout the supply chain, from manufacturers to exporters, to importers, to retailers, to consumers. There's lots of nodes along that supply chain that can absorb some of the cost.

[00:04:10] James Athey: What we would point to as being really interesting data that's come out recently is out of Japan. Specifically relating to the export of automobiles. So what you can see in that data is that essentially the relationship between volume and value changes has diverged significantly for the US and hasn't for the rest of the world.

[00:04:31] James Athey: So to put that in layman's terms, the price of Japanese autos exported to the US has gone down in a way that it hasn't for Japanese auto exports to the rest of the world. That is specific evidence that rather than US consumers paying for automobile tariffs with higher prices, Japanese manufacturers are doing so.

[00:04:51] James Athey: And again, the level of competition in that industry, particularly because of significant domestic automobile production, would've always suggested us that was a likely candidate for where the consumer would end up paying less or even none of the tariff. Different goods in different sectors will have different dynamics and therefore these price effects will likely vary.

[00:05:12] Nathan Sweeney: A very interesting point, and we have been discussing that at length within the team and we're of the view that, look, we're not gonna get this big inflation spike that people think we're gonna get. And I think another confirmation of that has been the unemployment figures this week because people are thinking, Hey, this is gonna create a big hit to growth as well and slow down the economy.

[00:05:30] Nathan Sweeney: But are we seeing any sign of that in the unemployment figures?

[00:05:33] James Athey: No. I mean, we've been sort of confused, baffled, confounded, and and frustrated by labor market data in the US for several years. To be honest. I could talk for hours, I won't, 'cause I think listeners will be asleep very quickly on a Monday morning if I do.

[00:05:46] James Athey: But there's lots of inconsistency, shall we say, between different sources of data for the labour market. But the one that everybody looks at, non-farm payrolls, which came out last week, as you've said. There's noise in that report, but there is certainly no evidence of sort of aggressive or
rapid deterioration of labour market conditions so far again, so good for the president.

[00:06:12] Nathan Sweeney: The other big news this week was the big beautiful bill, so what's your take on spending in the US government spending?

[00:06:19] James Athey: Yeah, I mean, it's half right. It's definitely big. I'm not sure beautiful is the adjective I'd reach for if I were describing it personally. It's kind of frustrating, but not in a surprising way.

[00:06:30] James Athey: You know, this is just an extrapolation of what we've seen in the US for decades, really. Democrats and Republicans don't agree on very much. One wants to increase spending, one wants to cut tax in order to please everybody. You do both. And of course, that's generally bad for the deficit.

[00:06:45] James Athey: In recent years even within the sort of Democrats and the Republicans, you've had several caucuses, several subgroups that have subtly different wishes, wills and desires. And again, the answer has been to give everybody what they want. And the inevitable outcome of that is lower revenue and higher spending and real damage to the deficit.

[00:07:04] James Athey: I think the magnitude on a year over year basis for the coming years is not massive. You're probably talking about. A budget deficit around 7% of GDP, and that's roughly where it is today and roughly where it's been over the last few years. What it certainly isn't though is any evidence of fiscal restraint.

[00:07:23] James Athey: And so I think that question mark, that concern will continue to bug and bother fixed income investors.

[00:07:30] Nathan Sweeney: Speaking of fiscal restraint, what was happening in the UK bond markets this week?

[00:07:35] James Athey: The gilt market has shown itself over the years to be more than willing to surprise, scare, shock, and worry its investors sometimes with good reason, sometimes less good.

[00:07:47] James Athey: Similar to the US we have concerns about fiscal policy in the UK and its sustainability over the long term, quite how that was catalysed as a result of a prime minister's questions where the chancellor wasn't necessarily given fullthroated support from the Prime Minister and she seemed to shed a tear.

[00:08:06] James Athey: How that spiraled into a pretty large one day gilt sell off, but you know, only the gods can answer. But realistically, the Labour Party has beared its teeth and really demonstrated that while the government on the face of it has a huge majority in the House of Commons, their effective majority because of division within the party is much smaller, and ultimately that's not a great sign for anybody hoping for a more responsible fiscal stance over the rest of this government's parliament.

[00:08:39] Nathan Sweeney: Okay, thank you, James.

[00:08:41] Nathan Sweeney: Really, really insightful as always. There's lots of great stuff in there for our listeners, we'll just take a quick look at the week ahead. So actually, it's a really, really quiet week in terms of data, and the big focus will be on the 9th of July because that's when a lot of these trade deals were expected to be done.

[00:08:55] Nathan Sweeney: And if there's not, we'll have to wait and see what Donald Trump has in store. I. We're probably expecting a little bit of softness in equities in the run up to that, but all will become clear pretty soon On the data front, we've got GDP go out in the UK and we've got minutes from the previous central bank meeting in the US so FOMC minutes.

[00:09:16] Nathan Sweeney: So thank you for joining. Hopefully you found that insightful and see you all next week.