The dollar index (DXY00) on Friday fell by -0.41%, undercut by Friday's weaker-than-expected US consumer sentiment report.  The dollar also suffered from underlying foreign investor concern about the possibility of a politically-driven US monetary policy after US Treasury Secretary Bessent on Wednesday appeared to give the Fed marching orders on how much to cut interest rates.  The dollar fell on Friday despite a +4 bp rise in the 10-year T-note yield, which supported the dollar's interest rate differentials.

The markets on Friday were awaiting the outcome of the Trump-Putin summit on Friday afternoon. The outcome could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.

Friday's headline US retail sales report was slightly weaker than market expectations, but there was an upward revision for June, leaving the report roughly neutral for the markets. The markets welcomed the report amidst worries about how US retail spending will hold up with a weaker labor market and consumer uncertainty about inflation and the economic outlook.  July US retail sales rose +0.5% m/m, slightly weaker than market expectations of +0.6%, although June was revised higher to +0.9% from +0.6%.  July retail sales ex-autos rose +0.3% m/m, in line with market expectations and down from June's revised +0.8% (preliminary +0.5%).

The University of Michigan's preliminary-Aug US consumer sentiment index fell by -3.1 points to 58.6, which was weaker than expectations for a slight +0.3 point increase to 62.0. The survey showed that US consumer expectations for inflation rose to +4.9% over the next year and to an annual +3.9% for the next 5-10 years.  The survey also found that 58% of consumers plan to cut spending due to inflation.

July US import prices rose +0.4% m/m, which was stronger than expectations of +0.1%.  On a year-on-year basis, July US import prices strengthened to -0.2% from a revised -0.5% y/y in June.  July US import prices ex-petroleum rose +0.3% m/m versus June's revised -0.2% (preliminary unchanged).

Friday's July US industrial production report of -0.1% m/m was slightly weaker than expectations of unchanged, although June was revised upward to +0.4% m/m from +0.3%.  July manufacturing production was unchanged m/m, matching market expectations, while July was revised higher to +0.3% from +0.1%.

The Aug Empire manufacturing index of 11.9 was substantially stronger than market expectations of zero and was up from July's 5.5.

Chicago Fed President Austan Goolsbee on Friday delivered mildly hawkish remarks, stating that he would like to see at least one more inflation report to ensure that persistent inflation pressures aren't emerging.  He expressed concern about the high service inflation data in the July CPI report, but noted the importance of not placing too much weight on a single month's data.

The markets on Friday continued to adjust to the inflation outlook following Thursday's hawkish PPI report.  The July final-demand PPI surged to +3.3% y/y (nominal) and +3.7% y/y (core).  The PPI report suggested that the markets were overly optimistic about Tuesday's CPI report and that companies are passing through tariffs at the wholesale level at a higher pace than earlier thought. Following the report, the markets erased any hopes of a -50 bp rate cut at the Fed's September meeting and pulled back expectations for a -25 bp rate cut to the 93% area from 100% before the report. 

Weak Chinese economic reports on Thursday night were negative for the global economic growth outlook.  China's economy is weakening due to US tariffs and the Chinese government's attempt to crack down on excessive competition that has driven prices to loss-making levels in some industries.  China's July retail sales report of +3.7% y/y was weaker than expectations of +4.6% and down from June's +4.8%.  China's July industrial production report of +5.7% y/y was weaker than expectations of +6.0% and was down from June's +6.8%.  China's July jobless rate rose to 5.2% from June's +5.0% and was higher than expectations.  China's July property investment fell -12.0% ytd y/y from -11.2% in June and was weaker than expectations of -11.4%. 

Regarding tariffs, President Trump on Friday said, "I'll be setting tariffs next week and the week after on steel and on, I would say chips – chips and semiconductors, we'll be setting sometime next week, week after." Mr. Trump last week said he planned a 100% tariff on semiconductors but would exempt companies that move chip manufacturing to the US.  Mr. Trump also mentioned 200% or 300% tariffs on chips.

In other recent tariff news, Mr. Trump on Tuesday extended the tariff truce with China for another 90 days until November.  Mr. Trump announced last Wednesday that he will double tariffs on US imports from India to 50% from the current 25% tariff, due to India's purchases of Russian oil.  Last Tuesday, Mr. Trump said that US tariffs on pharmaceutical imports would be announced "within the next week or so." According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 85% at the September 16-17 FOMC meeting and at 40% for a second -25 bp rate cut at the following meeting on October 28-29.

EUR/USD (^EURUSD) rose +0.47% on dollar weakness.  The euro had some underlying support from hopes of some progress on ending the Russia-Ukraine war at Friday's Trump-Putin summit.

Swaps are pricing in a 5% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.

USD/JPY (^USDJPY) fell -0.56% due to weakness in the dollar. The yen saw some underlying support after US Treasury Secretary Bessent earlier this week said the Bank of Japan is falling behind the curve in addressing inflation and that he expects a rate hike. However, the yen continues to be undercut by concern that US tariff policies will harm the Japanese economy.

December gold (GCZ25) on Friday closed down -0.60 (-0.02%), and September silver (SIU25) closed down -0.094 (-0.25%).  Gold prices fell Friday as the market trimmed expectations for a -25 bp rate cut by the Fed in September to 85% from 93%.  Silver saw weakness on concern about industrial metals demand after Friday's weaker-than-expected US consumer sentiment index and Chinese economic data.

Gold continues to have safe-haven support related to US tariffs and geopolitical risks, including the conflicts in Ukraine and the Middle East.  Fund buying of precious metals continues to support prices after gold holdings in ETFs rose to a 2-year high on Tuesday, and silver holdings in ETFs reached a 3-year high on Thursday.