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Financial Highlights
Growth holds, labor cracks appear, and global tensions grow
The U.S. economy remains surprisingly resilient midway through 2025, with GDP expected to grow over 3% in Q2, driven by steady consumer spending and real wage growth (wages up ~3.9%, outpacing inflation). Despite unreliably soft sentiment surveys, the labor market is holding firm with a low 4.2% unemployment rate even as other cracks appear at the margins. Low hiring is frustrating job searchers, but low firing is showing companies are attempting to see past uncertainty.
Inflation is actually cooling nicely: May’s CPI came in at 2.4% year-over-year, a slight uptick due to the sneakily low May 2024 report. PPI followed suit at 2.6%, which was on target. The higher reading than CPI may point to businesses absorbing some of the tariffs rather than pass them on fully. Even with the shipping interruptions and new tariff threats, inflation hasn’t surged. Companies appear to be managing supply chains and inventories proactively to blunt cost pressures.
Markets have certainly taken notice. After a spring slump, the S&P 500 bounced back over 20%, bolstered by easing inflation, strong earnings, and hopes that the tariffs will slowly dissolve into bluster. With that said, trade still remains a wild card. A tentative U.S.–China deal trimmed steep tariffs, but other global trade negotiations remain in limbo ahead of a July 9 deadline. Even with the possible extensions, tariffs across the board could rise, potentially dampening growth and further lifting prices on goods as many businesses’ inventories require a refresh. Services, the lion’s share of the U.S. economy, aren’t immune but should be less affected.
Meanwhile, the Fed is expected to start cutting rates in the second half of the year, especially with inflation cooling and real rates still elevated. Futures markets are pricing in two rate cuts by year-end, which could add fuel to the economy and support corporate earnings into 2026. September is still the best chance for our first rate cut, given what we know about the Fed’s priorities. Powell’s Wednesday presser should offer further insight.
Lastly, the Middle East conflict between Israel and Iran is a big story this week and sent the market down and oil up. The contribution this may make to our economic environment is mostly unknown, but geopolitical unrest is never good. Persistently higher oil prices will also add pressure to inflation over time.
What this means for investors
Expect some choppiness in the months ahead as the heady brew of trade wars and real wars wreak havoc on forward guidance. Today, underlying economic strength and possible Fed rate cuts create opportunities. Use pullbacks to add quality, diversify broadly, and stay focused on the long game. There is always a reason to sell; good investing discipline is how you come out ahead.
Market Activity
The conflict between Israel and Iran is sending oil prices higher and is only the beginning of the disruption. Tanker companies are already declining contracts to ship through the Strait of Hormuz. Oil will rise, and shipping costs will rise with it.
The long end of the yield curve is down WoW and would be down further if it weren’t for the conflict, but still higher than three months ago. The 2-yr and the 5-yr haven’t budged at all compared to three months ago. Retirees who aren’t worried about excessive inflation and want to park it in something safe have great options in fixed income right now.
Stocks
Fixed Income
Economic Reports
Last Week
The economy is sending mixed messages again. CPI was lower than expected to the chagrin of all of us expecting a hot print, and jobless claims advanced further into a rising trend.
The unrounded CPI numbers were as follows:
- Headline CPI: +0.08% MoM; +2.38% YoY
- Core CPI: +0.13% MoM; +2.77% YoY
This continued cooling trend is unequivocally good news, although upward pressure from tariffs is happening (see the Charts of the week). Cooling shelter is helping lower inflation even as some other factors rise. Now, it is true that without tariffs, inflation would probably be even lower, and the Fed would be cutting already. But we don’t live in that world, so we just have to be happy with the cooling inflation we have.
Jobless claims are another story. While CPI is showing an improving trend, the labor market is certainly deteriorating, albeit from a relatively strong position. We’ll see next week how the Fed assesses the various risks to the economy, but I don’t believe they will feel the labor market is weak enough to warrant a pivot towards cuts yet.
Next Week
FOMC press conference 2p Wednesday. Prepare for some fireworks on social media regardless of the FOMC outlook. Jobless claims will be on the rise again. There is some doubt that retail sales will remain positive in May.
Earnings Releases
Larry Ellison (+$40B post-earnings) is now the 2nd richest person in the world after Oracle (+22% post-earnings) popped and kept on popping to close the week.
Last Week
Next Week
Recommendations
Stablecoins
- Ok, Boomer | The always well-researched Michael Cembalest dives into questions and stats regarding stablecoins, which look to be the next great vector for financial contagion as crypto-FOMO overtakes rational caution.
The data isn’t bad, it’s just making bad choices
- Economists Raise Questions About Quality of U.S. Inflation Data | Staffing shortages at the Bureau of Labor Statistics limited their normal assessments and caused 2x the typical number of alternative estimates. Bad news for more than just the data nerds.
- Economic data quality deteriorates — 2 thoughts for investors | Diversify your data sources and use your head when assessing everything. Nothing is perfect, revisions happen, and if all else fails, look to earnings.
The dual mandate is in tension
- Economic Sogginess and the Market Party | Hmm..this economy doesn’t look fresh. What is the sell-by date?
- The labor market won't offer the same buffer this time | The notable strength of the labor market in 2022-23 served as a critical buffer against a recession. We can’t expect the same magic today.
- New Grads Join Worst Entry-Level Job Market in Years | The unemployment rate for degree-holders age 22 to 27 hit 5.8% earlier this spring, its highest level in about four years, and well above the national average.
- Are Businesses Absorbing Tariffs or Passing Them to Their Customers? | Yes.
- Companies don’t wait for tariffs to come into effect | Many retailers took the plunge before tariffs even happened.
Chart(s) of the Week
Treasuries have been dominating the new issue market, and its crowding out everything else. This is one of the costs of so much federal debt; other investment opportunities could lose access to investor funds due to the market dilution. Assuming an environment of limited funds, this could create a drag on growth in the economy.
Are we in a position where there is a shortage of dry powder for investing? I don’t think so. I think we’re flush with cash to the point that high rates haven’t held back the market or economy at all*.
At the same time, foreign holders of long-term US debt have gorged on our new issuance. Even with recent sales in 2025, foreign holdings have ballooned thanks to the US’s comparatively high interest rates over the past decade.
*Housing market notwithstanding. We’re starting to see it rollover as buyers just won’t meet sellers at their list prices and are sitting it out.
The incentive to own the S&P 500 is at its lowest level since 2002. The trade-off of stocks over bonds is harder to justify when treasuries offer a compelling return. Retirees should be especially focused on this when allocating their portfolios. If a 4.5% return covers your expenses, why take extra risk?
It appears that under the hood, CPI is being impacted by tariffs at a (slowly) growing rate, but it is being offset by other forces cooling, such as shelter, insurance, and gasoline, to name a few. Given the action in Iran, I think gasoline and oil’s recent trends are about to be reversed quickly.
“[S]ince new tariffs on China were announced in February, these series have added, rather than subtracted, to the monthly CPI, just like they did in the first trade war (shaded in green). Moreover, China-dominated CPI momentum (1 percent) now exceeds that of the overall CPI (0.8 percent), just as it did during times in the first trade war. So, tariffs are very much showing up in the CPI.”
Gold is not just having a moment, it’s having an era. Central bank holding ever-increasing amounts of gold will put a floor on the asset for the foreseeable future. Crypto is not likely to ever be a player since central bankers don’t want to lose a finger.
Inflation isn’t spread evenly. In states along the East and the West coasts, prices generally increased above the national average. The lowest rate in the country by a relatively wide margin was 1.4% in the West South Central region, which includes Arkansas, Louisiana, Oklahoma, and Texas. This explains some of the diverging sentiment we’ve been seeing.
