This past week brought little in the way of new economic indicators, leaving the spotlight firmly on escalating US – EU trade tensions, President Trump’s tax-cut legislation, and market movements in Japan. We’ve now reached the midpoint of President Trump’s 90-day pause on reciprocal tariffs aimed at Europe—and the pressure is mounting.

As of May 23, 2025, trade talks between Washington and Brussels have intensified. Early Friday morning, reports emerged that US trade negotiators are pushing for unilateral tariff cuts from the EU on American goods. Without such concessions, the U.S. has warned that talks will stall, and the threat of a 20% “reciprocal” duty on EU imports will return. This news sparked an immediate market reaction, with Bund yields surging 30bps before retreating later in the day.

Currently, a reduced 10% tariff remains in place as a temporary measure to facilitate negotiations. However, the US remains dissatisfied with the EU’s counteroffer of mutual tariff reductions. Washington is demanding unilateral concessions, particularly regarding the EU’s proposed digital tax and greater access to European markets under American standards and investment terms.

In response, the EU has suspended its retaliatory tariffs on €23 billion of U.S. goods but is preparing a broader package that could target up to €95 billion more if talks break down. The potential new tariff list includes agricultural products like processed fruits and vegetables, fish, and key industrial exports—autos, machinery, electrical equipment, and notably, Boeing aircraft and Bourbon whiskey.

Despite the rising tension, Italian Economy Minister Giancarlo Giorgetti voiced optimism, suggesting a deal could mirror the recent US-UK agreement, which featured lower tariffs on autos and increased agricultural trade.

However, Friday afternoon saw another jolt. President Trump tweeted that a 50% tariff on EU goods could be imposed starting June 1. He claimed the EU was “formed primarily to take advantage of the USA on trade.” The tweet reignited volatility: Bund yield fell nearly 10bps at one point, while the S&P 500 dropped by 1.6%.

Meanwhile, in Washington, the U.S. House of Representatives passed a sweeping tax and spending bill by a narrow 215-214 margin—an integral part of Trump’s campaign platform. The legislation is expected to add $3.8 trillion to the federal debt over the next decade, which currently stands at $36.2 trillion (124% of GDP). Moody’s responded last week by downgrading the U.S. credit rating. The bill includes tax breaks for tips and car loans, alongside increased funding for the military and border enforcement.

With the July 8 deadline looming, markets remain on edge. The coming weeks will be critical in determining whether these tensions erupt into a full-scale trade war or give way to compromise.