Markets Are Ignoring Tariff Risks That Betting Markets Are Starting to Price In
Stocks are heading into a quiet session despite growing concerns beneath the surface—particularly in the bond market, which was rattled Tuesday after June’s consumer price index posted its biggest monthly gain of 2025.
That surge is raising questions about whether tariff-related inflation is starting to seep into the data. Henry Allen, macro strategist at Deutsche Bank, says markets remain “remarkably complacent” in the face of mounting inflation risks.
“Investors are still underestimating inflation, just as they did ahead of the 2021–23 spike,” Allen wrote in a note Wednesday. “And for a fourth straight year, markets have overestimated how dovish the Fed would be.”
Allen points to several global inflation triggers. Chief among them: rising tariff threats. Former President Donald Trump has proposed a 10% baseline tariff on most countries, along with targeted levies on steel, aluminum, autos, and potentially copper—a sector particularly vulnerable to global price swings.
Betting markets now assign a 28% chance that Trump’s proposed 30% tariff on European Union imports will take effect, and a 43% chance that a 35% tariff on Canadian goods will be enacted. “If imposed, these would be a genuine surprise for markets, which are largely ignoring these risks,” Allen said.
He warns that retaliatory tariffs from the EU and other trading partners are highly likely. The EU already has a list of U.S. goods it could target. “The scale of proposed tariffs would likely spark a global response,” Allen said, “rewiring supply chains and driving inflation higher across the board.”
Tuesday’s CPI data offered a warning shot: household appliance prices surged by the most on record in a single month. That strength in core goods, Allen says, could broaden out across the consumer basket.
Another inflationary wildcard: geopolitics. Last month’s flare-up between Iran and Israel briefly spiked oil prices—just one example of how surprises can quickly ripple through global markets.
And while bond markets are still pricing in another rate cut from major central banks this year, Allen cautions that expectations continue to run ahead of reality. At the start of 2025, traders were betting on a Fed cut by June—one that never came.
“Markets continue to anticipate rate cuts that don’t materialize, adjusting only when stronger growth or stickier inflation forces a rethink,” Allen noted.
“In the end, inflation pressures—especially from tariffs—are still being underestimated,” he said. “And that leaves markets vulnerable to another round of surprises.”
