Executive Summary
The first week of July confirmed a shift in the global landscape: a weaker dollar, rising trade tensions, growing fiscal risks in developed economies, and Latin America navigating between technical opportunities and structural vulnerabilities. The United States combines signs of labor strength with an accelerated deterioration in its fiscal accounts, while Trump reactivates his tariff agenda. Europe deepens its stimulus cycle but faces a loss of external competitiveness. In Asia, China and Japan are moving in opposite directions, between internal expansion and currency pressure.
In Latin America, Colombia stands out for a notable exchange rate appreciation, although strained by high-risk fiscal maneuvers, falling strategic exports, deterioration in the diplomatic front with the U.S., and a healthcare system on the brink of collapse. Mexico, meanwhile, faces alerts in its financial system and a cooling labor market. Global financial markets combined historic highs in technology with declines in Europe and Asia, while oil retreated and gold resumed its role as a refuge amid U.S. fiscal noise.
The dominant narrative of the week no longer revolves around inflation or recession but around confidence in fiscal rules, institutional order, and the sustainability of the economic model in each country. This tension is analyzed in depth in the closing column, which compares the risk trajectories between Colombia and Brazil.
United States
The June labor data once again contradicted cooling warnings: 147,000 non-agricultural jobs were created compared to the expected 106,000, the unemployment rate dropped to 4.1%, and wages moderated their advance to 0.2% monthly / 3.7% year-on-year. Although participation fell by a tenth to 62.3%, the rebound accumulated over the previous two months brought the average employment of Q2-25 to 150,000—well above Q1’s 111,000—and solidified the idea of a resilient labor market. With these numbers, the implied probability of a -25 bp cut at the September 17-18 meeting fell to 77%, and the option of an immediate cut in July practically vanished, giving the Federal Reserve room to “wait and see” the effect of the new tariffs on inflation.
Business activity continues to show resilience. The services ISM rose nearly a point to 50.8, signaling expansion, while the manufacturing ISM rebounded to 49.0—still in contraction, but for the fourth consecutive month above March’s minimum threshold. In qualitative comments, industry executives cited “tariff uncertainty” and geopolitical risks as the main obstacles to new orders, although they did not report significant investment suspensions.
On the fiscal front, President Trump signed the “Big, Beautiful Bill” on July 4, making the 2017 tax cuts permanent, adding deductions on tips and overtime, and creating a new 1% tax on remittances. The CBO projects the law will add USD 3.4 trillion to the cumulative deficit by 2034, while raising the spending cap and cutting energy transition and Medicaid allocations. With federal debt already at USD 36.2 trillion (≈123% of GDP), fiscal sustainability is back at the center of the debate: Moody’s downgraded the sovereign rating to Aa1 with a stable outlook in May, warning that the red balance could approach 9% of GDP by 2035 if not matched with greater growth or revenue increases.
In parallel, the White House opted for a unilateral path in its trade war: Trump confirmed that letters would be sent to 12 countries imposing “10% to 70%” tariffs effective August 1, after the 90-day truce expires on July 9. The partial relief gesture on technological restrictions against China gave a signal of de-escalation, but the protectionist tone reinforces the narrative of risks for supply chains and imported inflation.
For the markets, the balance between a robust labor market and procyclical fiscal stimulus—financed with more debt—maintains the debate between growth and inflation. Our year-end estimate places the 10-year Treasury around 4.50% and the euro-dollar at 1.15-1.20, with a downward bias for the greenback if the Fed’s stance normalizes before the inflationary effects of tariffs subside.
Conclusion
The economy maintains a surprisingly firm pulse, but it does so on increasingly fragile fiscal scaffolding. The strong performance of the labor market and the resilience of activity provide the Federal Reserve with a window to maintain a cautious stance, but the new fiscal plan—which extends the 2017 tax cuts, increases defense and immigration control spending, and dismantles incentives for the energy transition—adds USD 3.4 trillion to the projected deficit over the next decade. With debt already near USD 36.2 trillion (≈123% of GDP) and a structural deficit estimated at 7%, this procyclical and regressive stimulus concentrates benefits in the upper income brackets and shifts the cost to the sovereign balance sheet, limiting the scope for countercyclical monetary policy action.
In an environment marked by unilateral tariffs of up to 70% and a reduced migrant labor supply, the risk is no longer a classic recession, but asymmetric overheating that progressively erodes price stability and confidence in the dollar. The Fed will face the challenge of preserving its anti-inflation credibility without stifling expansion, while markets have already incorporated a fiscal risk premium that could push the 10-year Treasury yield into the 4.50%-4.65% range. In this context, the dollar has accumulated a depreciation of nearly 10% against a basket of currencies in the first half of 2025—the worst semi-annual performance since 1973—pressured by fiscal deterioration, political uncertainty, and growing expectations of rate cuts. This trend is already reflected in major global currencies and reinforces the risk of a structural depreciation if fiscal imbalances are not corrected with consistency and institutional discipline.
Europe
The European economy is navigating a phase of contained slowdown, marked by mixed signals in production and an expansive bias from monetary policy. In May, producer inflation in the eurozone fell to 0.3% year-on-year—dragged by moderation in energy prices—while the manufacturing PMI slightly rebounded to 49.5 points, its highest level since mid-2022, though still below the expansion threshold. The construction sector index remained in contraction territory, reflecting a still-fragile housing market.
In Germany, factory orders grew 5.3% year-on-year, slightly below the expected 5.7%, but confirming a gradual recovery in industrial activity, supported by reduced energy costs. In France, industrial production moderated its decline to -0.5% monthly, while in Spain, annual growth reached 1.7%—driven by non-durable consumer goods—and in Italy, retail sales increased 1.3% year-on-year, though with a monthly decline of 0.4%. In the UK, despite a strong increase in electric vehicle sales, business confidence in the construction sector continued to deteriorate.
From a monetary policy perspective, the European Central Bank maintains a decidedly dovish tone. Minutes from the June 3-5 meeting revealed high concern over global risks derived from U.S. trade policy, which justifies the accumulated rate cuts—already eight since mid-2024—down to a 2.00% deposit rate. Although overall inflation reached the 2% target in June, the ECB warned it could remain below that level until the end of 2026, pressured by factors such as the strength of the euro, low energy prices, and the risk of imported deflation via China. The bank considers current rates already in a “neutral or possibly accommodative” range and left the door open for a further 25 bp cut in December if the trade environment and weakening growth justify it.
In parallel, the ECB presented a moderate revision of its strategic framework during the Sintra forum, reaffirming its symmetrical inflation objective and a more balanced reaction function. It also reiterated that unconventional tools—negative rates, asset purchases, forward guidance—remain available but should be used with greater prudence in mixed scenarios like the current one. In the markets, the euro has gained more than 14% against the dollar in the first half of 2025—its best semi-annual appreciation since 2009—a movement the ECB attributes not only to the weakness of the dollar but also to renewed interest in the euro as an international reserve currency, although it warned about the negative impact this strength could have on exports.
On the fiscal front, tensions are growing within the European Union over the Commission’s proposal to cut up to 20% of resources allocated to the Common Agricultural Policy (CAP), aiming to redirect them to defense spending. The proposal seeks to unify cohesion funds with agricultural ones, which has generated strong resistance from countries like France, Spain, and Italy, the main beneficiaries of the CAP. Farmers warn that this measure would weaken the structure of rural support, while the European Parliament has approved a resolution to maintain the CAP as a separate fund, adjusted for inflation and with clear climate objectives. The Commissioner for Agriculture and the EU Court of Auditors have also expressed reservations about the transparency and effectiveness of the new model. The discussion, which directly impacts the institutional balance of the bloc, occurs in a context where Ukraine seeks full accession and European resources face growing pressures from the expiration of the post-pandemic recovery plan.
Conclusion
Europe is moving toward a phase of flexible monetary policy in a still-weakened macroeconomic environment with growing political pressures. The moderation in inflation, signs of slowdown in industry, and the euro’s rebound have forced the ECB to adopt a more accommodative tone, with further cuts possible if the scenario of inflation below the target solidifies. However, the sustained appreciation of the euro, which has reached record highs against the dollar, threatens to reduce the region’s external competitiveness and weaken the industrial recovery.
The budgetary discussion for the 2028–2034 period marks a political turning point: the attempt to divert resources from agriculture to defense generates divisions among member states and poses a new balance between food security, territorial cohesion, and strategic autonomy. Overall, Europe faces the challenge of sustaining its expansionary policy without compromising its institutional structure or the credibility of the ECB, in a context of economic fragmentation, global trade tensions, and loss of structural dynamism.
Asia
In Asia, the week was marked by a combination of trade tensions, macroeconomic adjustments, and regional contrasts in economic activity. In China, the manufacturing PMI rose strongly in June to 50.4 from 48.3 in May, signaling a technical return to expansion—and representing the best data since the first quarter. However, this rebound contrasted with the fall of the services PMI to 50.6 and growing trade tensions with the European Union: in response to the bloc’s restrictive measures, China announced tariffs on European brandy, although it exempted 34 exporters who accepted price commitments under the anti-dumping investigation. This decision reflects Beijing’s attempt to contain frictions and project a regulatory moderation image.
In Japan, the macroeconomic environment remains conditioned by the combination of persistent inflation, stagnant wages, and yen appreciation. The latest Basic Survey of National Life revealed that 59% of households consider their economic situation “difficult,” a figure reaching 64% among families with children. Although average income rose 2.3% year-on-year and some segments—like pensioner households—marginally improved, the mismatch between cost of living and real wages maintains latent social pressure that is shaping up as a central theme in the July elections.
Nevertheless, the Bank of Japan’s Tankan survey showed positive signals on the business front: the manufacturing sector index rebounded from 12 to 13 points, surpassing the average of the last two years (9.75), and the general index remained at 23 points. This rebound was accompanied by an increase in household spending, which strengthened the yen and added pressure on exports at a time of growing external vulnerability. The perception of risk among Japanese companies also intensified: according to a survey by Teikoku Databank, 44% of companies expect negative effects from U.S. tariffs in the next five years, while 38% remain uncertain. Some firms have already canceled expansion plans in the U.S., showing how the Trump administration’s trade strategy is reshaping investment decisions in the region.
India, on the other hand, is positioning itself as a strategic axis for the reconfiguration of Asian supply chains. This week, Japan and India held a bilateral event focused on critical minerals and battery production, with participation from more than 70 companies from both countries. The initiative aims to reduce structural dependence on China in the refining of essential minerals and strengthen technological cooperation in key sectors such as electric vehicles and energy storage. Meanwhile, India’s manufacturing performance remained robust, unlike several Southeast Asian countries (ASEAN), where weakening global trade and tariff uncertainty are slowing activity.
Conclusion
Asia faces an increasingly fragmented environment: while China attempts to project stability with positive manufacturing data and moderate anti-dumping decisions, structural tensions with the European Union and the United States continue to escalate. Japan, despite the business rebound and household spending increase, remains caught between persistent inflation, a strengthened yen eroding external competitiveness, and a business perception marked by tariff uncertainty.
India positions itself as a strategic partner in the energy transition and supply chain diversification, consolidating a regional power triangle between Beijing, Tokyo, and New Delhi. Overall, Asia is moving toward a geopolitical reconfiguration forced by the new trade order, where investment flows are redirected based on strategic security rather than productive efficiency. The region no longer competes solely for growth but for its ability to adapt institutionally to a global environment of changing rules.
Mexico
The Mexican economy faces concerning signals from the labor market, contrasting with the official narrative of stability. According to the Mexican Social Security Institute (IMSS), 46,378 formal jobs were lost in June—the most negative figure for that month since 2020. This loss completed a consecutive quarter of net job destruction, accumulating 139,444 positions eliminated between April and June, and leaving first-half growth at just 87,287 new jobs, a year-on-year decline of 70.4%—the largest contraction since the pandemic. Although 87.5% of the total 22.3 million registered jobs remain permanent, annual net growth is practically zero (0.03%), reflecting a stagnant formal economy, with sectoral advances still present in commerce, electricity, and transportation.
In parallel, the Mexican government celebrates what it considers a structural advantage over Vietnam following the new trade agreement between the U.S. and the Asian country, which imposes average tariffs between 35% and 40% on Vietnamese exports. According to the Secretary of Economy, Marcelo Ebrard, this gives Mexico a “6 to 1 advantage” in terms of access to the U.S. market under USMCA. Although the government dismisses immediate risks from U.S. fiscal incentives for relocating companies, experts warn about potential indirect effects if Washington redefines origin rules or imposes sanctions for “transshipment,” an ambiguous category that could affect strategic sectors such as automotive. Alerts intensify due to recent announcements of relocation of operations by General Motors, Audi, and Honda, suggesting that Mexico’s apparent advantage could fade if not consolidated into an industrial policy with technical content and clear rules.
On the financial front, the Mexican banking system was exposed to one of the most aggressive extraterritorial sanctions implemented so far by the U.S. The Financial Crimes Enforcement Network (FinCEN) announced unilateral measures against CIBanco, Intercam, and Vector Casa de Bolsa for alleged links to money laundering networks associated with drug cartels. The entities were designated as “priority interest in money laundering” under the new anti-narcotics legislation related to fentanyl, implying a total ban on transfers with U.S. institutions. Although Mexico found no evidence of systematic money laundering, it did impose administrative sanctions totaling over 134 million pesos and launched internal investigations following a visit by a senior Treasury official to the May Banking Convention.
The immediate impact was severe: operations were isolated, payments were blocked, funding lines were suspended, and individual and corporate customers withdrew funds en masse. The most delicate case is CIBanco, the main fiduciary of financial issuances such as real estate funds and private capital certificates in Mexico, which puts the fulfillment of local securities market commitments at risk. FinCEN granted a deadline until July 21 to restructure or disassociate operations with the sanctioned entities. Although the government of Claudia Sheinbaum has cooperated with the U.S. on migration and security matters, the measure threatens to escalate bilateral tensions just as Mexico seeks to preserve financial stability and international credibility under the new Republican administration.
Conclusion
Mexico is going through a complex juncture where the structural strengths of USMCA contrast with growing internal weaknesses. The deterioration of the labor market, regulatory uncertainty in foreign trade, and the reputational impact on the financial system coincide at a geopolitically delicate moment. Although the agreement between the U.S. and Vietnam opens a competitive window for Mexico, its sustainability will depend on the country’s ability to offer clear rules, legal certainty, and a coherent industrial policy.
The blow to the banking system—due to its extraterritorial severity and punitive focus—sets a risky precedent for other actors in the financial system. Beyond the entities directly targeted, the case reflects a change in tone and methodology from the United States toward Mexico in terms of security and compliance, with implications not only legal but reputational and operational. Overall, the country needs to strengthen its financial and labor institutions if it wants to capitalize on the comparative advantages it still holds and prevent them from being diluted under external pressures and persistent internal weaknesses.
Colombia
Colombia ended the week with a highly complex macroeconomic picture, marked by internal divisions in monetary policy, new fiscal maneuvers in external and internal debt, diplomatic frictions with the United States, falling strategic exports, and a structural deterioration in the healthcare system. Despite isolated signs of inflation moderation and some GDP recovery, fiscal fundamentals remain under tension, while the use of extraordinary tools to sustain solvency perception and capital flows accelerates.
Minutes from the Banco de la República revealed a divided Board regarding the continuation of the rate-cut cycle. Four members voted to keep the rate at 9.25%, two for a 50 basis point cut, and one for a 25 basis point cut. Although overall inflation marginally declined to 5.1% and core inflation to 4.8%, pressures persist on processed foods and services. Inflation expectations, although stable in the short term, remain above the medium-term target. In parallel, fiscal deterioration—intensified by the activation of the escape clause and the growing deficit for 2025—restricts the scope of maneuver for policy.