Financial markets are beginning the week in a remarkably-calm state after the Trump administration spent the weekend escalating its trade war and stepping up its assault on Federal Reserve chair Jerome Powell. The dollar is trading on a slightly firmer footing after posting its best performance since February last week, Treasury yields are up incrementally, and equity futures are pointing to modest selling at the open.

Both the euro and Mexican peso are trading only slightly below Friday’s closing levels, even after Trump threatened to impose 30-percent tariffs on imports from August 1 in a pair of early-Saturday missives. Traders appear convinced that the European Union and Mexico will offer the US enough face-saving concessions over the next three weeks to prompt a reversal, and the president’s history of delays and climbdowns would suggest that this is a relatively-plausible outcome. However, we would also note that a version of “boiling frog” syndrome—the idea that a frog will not jump out of a pot of water if the temperature is increased gradually, but will jump out if immediately placed in boiling water*—might be playing out, with investors failing to react to the ever-increasing taxation and uncertainty burden on the American economy.

Markets suffered a brief selloff on Friday afternoon when Bill Pulte, federal director of US housing finance, published a statement claiming that he was “encouraged by reports that Jerome Powell is considering resigning,” and saying “The patriotic thing for Jerome Powell to do is to resign”. Pulte’s claim appears to have been a fabrication—and the Supreme Court recently formalised limits on Trump’s capacity for firing the Fed chair without cause—but the president’s allies have opened a new line of attack, alleging that Powell’s handling of the Fed’s headquarters renovation has led to serious cost overruns. “Instead of attempting to right the Fed’s fiscal ship, you have plowed ahead with an ostentatious overhaul of your Washington DC headquarters,” Russ Vought, director of the White House Office of Management and Budget said in a social media post last week, and Kevin Hassett, director of the National Economic Council yesterday told ABC “It was never envisioned by the people that voted for the construction of the Fed that we currently see that the Fed could print money and toss it around willy-nilly”. “Jerome Powell is very bad for our country,” said Trump last night, “We should have the lowest interest rate on Earth and we don’t. And we know he should do it. And yet he’s spending $2.5 billion dollars rebuilding the Fed, the Federal Reserve buildings… I hope he quits. He should quit”.

The administration could live to regret its actions: a firing of, or early resignation by Powell—especially if coupled with his replacement by an avowed dove—could easily demolish confidence in the Fed’s independence, driving inflation expectations higher, pushing long-term yields skyward, lifting mortgage rates, and contributing to a broad-based selloff in the dollar. In the here and now, the “risk discount” embedded in the greenback is rising, reinforcing an ongoing reallocation in financial assets away from American markets.

From an event-risk perspective, this evening’s Chinese activity data could generate some movement, but the week’s most obvious potential volatility catalysts are clustered around tomorrow’s North American open.

Fiscal concerns are likely to simmer beneath the surface as UK Chancellor of the Exchequer Rachel Reeves delivers her second Mansion House address. The government is reportedly grappling with a budgetary shortfall exceeding £20 billion ahead of the Autumn Budget—stemming in part from recent reversals on welfare and fuel support, compounded by downward revisions to growth forecasts—and speculation is mounting around potential mitigation strategies. While the Chancellor’s remarks will primarily focus on measures to boost competitiveness in the critically-important financial services sector, investors will be watching for any hints on the government’s taxation plans, with the increasingly-unstable gilt market vulnerable to another series of ructions if she provides any clarity on the matter.

In the United States, inflation may have ticked higher last month, but most observers, including officials on the Fed’s rate-setting committee, expect price pressures to build more noticeably in the July and August data. Economists think tomorrow’s release will show headline inflation accelerating modestly in June, with the annual rate nearing 2.6 percent—up from 2.4 percent in May—while the core measure, which strips out volatile food and energy prices, rises 2.9 percent year over year, compared to 2.8 percent previously. Core goods prices, which have hovered near deflationary levels for much of the past three years, are seen edging upward as falling vehicle costs are offset by increases in tariff-impacted items.

The full impact of tariff increases is yet to arrive. Duties typically apply only to new shipments, and widespread confusion over shifting calculations—with tariffs often revised daily, sometimes within hours—has meant that implementation has proceeded in a haphazard manner. By our estimates, the effective tariff rate on US imports rose to approximately 9.4 percent last month—still well below the 18.7 percent rate that would apply if all of the Trump administration’s announced measures were fully in effect. It could take 60 to 90 days for higher import costs to filter through to consumer prices, and even then, the tariff incidence might build only gradually.

It is also worth noting that tariff revenues are still making an extremely small contribution to the overall US fiscal position. The chart below, which shows an impressive surge in incoming tariff revenues on the left side, but then compares them with a broader picture of government inflows and outflows on the right, illustrates the fact that tariffs cannot conceivably close the yawning gap between tax revenues and government spending.

Here in Canada, underlying inflation pressures are expected to remain stable even as headline prices accelerate somewhat. Tomorrow’s June data is seen showing a month-over-month increase of around 0.2 percent in the Bank of Canada’s preferred core price measures—a pace that would match the prior month and leave year-over-year gains unchanged—while the all-items basket is thought likely to print around 1.9 percent, up from May’s surprisingly-soft 1.7 percent. After Friday’s hotter-than-anticipated jobs release, swaps markets are putting just 20 percent odds on a July rate cut from the central bank, but persistent weakness in the economy has meant that the Canadian dollar has turned in the weakest performance among the major currencies against the greenback this year.

Traders will be kept on their toes later in the week as the UK publishes inflation and labour market updates, the US releases retail sales and durable goods orders, and a flock of Federal Reserve officials—including Governors Michelle Bowman and Michael Barr, Adriana Kugler, and Christopher Waller—speak ahead of the pre-meeting blackout period. Stay frosty out there.

*This is a metaphor. In reality, frogs jump as soon as they feel uncomfortable. I should also note that lemmings do not jump off cliffs en masse. Only humans do such dumb things.