JUNE 2025 MARKET INSIGHTS
Someone recently joked to me that the BBB or “Triple-B”, short for Trump’s “Big Beautiful Bill,” was a forecast for the US’ sovereign credit rating. While that may be extreme, it highlights the discontent among many that the Reconciliation Bill, as passed by the House, did little to control spending and is, in fact, likely to push the budget deficit higher in the near-term with the consequent need for greater borrowing. That should come as no great surprise as Trump has never been one to shy away from debt.
At first blush, the bond market’s reaction may seem counterintuitive with the 10-year Treasury Note yield falling 12 basis points in the week following passage[1]. That may just reflect a “sell-the-rumor-buy-the-news” sentiment, as the 10-year yield rose 25 basis points in May to 4.41%[1]. In the credit world, spreads tightened in May helping limit the Bloomberg Aggregate Bond Index to a -0.72% total return for the month compared to -1.03% for the Bloomberg US Treasury Index[1]. The weakness in bond prices came as the US Dollar Index slipped fractionally and appears to be at an important technical level that, if broken, could point to a drop to the 95 level (-4.40%)[1]. Still, for all the talk about the demise of the greenback, the dollar remains well above it’s long-term uptrend dating back to the 2008 Financial Crisis despite falling more than 8.00% year-to-date[1].
The “Tariff Pause Rally” in stocks that kicked off in April followed through in May with the Bloomberg 1000 Index rising 6.32% to bring the year-to-date total return into positive territory at 0.97%[1]. Solid first quarter earnings reports lent support, especially from the Magnificent 7 whose aggregate EPS beat the consensus estimate by 14% (only Tesla disappointed) compared to 6.60% for the Bloomberg 1000 Index[1]. It was “risk-on” in large caps with the Nasdaq 100 Index up 9.04% and the Bloomberg Mag-7 Index up 13.31% but not so for small caps[1]. The Bloomberg 2000 Index gained 5.29% but is lagging badly year-to-date with -7.73% total return[1]. International equities continue to far outpace domestic stocks year-to-date with a total return of 13.54% after tacking on 4.51% in May[1].
As I write this on May 30th, the latest economic data shows Personal Income was up 0.8% in April, much better than expectations, while Personal Spending was in line with expectations at 0.2% but down sharply from 0.7% the prior month[1]. The Federal Reserve Board’s preferred inflation indicators were again well behaved. Core PCE (Personal Consumption Expenditures) rose 0.1% in April, in line with expectations but up from 0.0% in March[1]. Year-on-year the Core PCE Index increased 2.5%, also in line with expectations and down a tick from 2.7% in March[1]. That figure compares favorably to first quarter Core PCE, released the previous day, which rose at a 3.4% annual rate[1]. The first month of tariffs appears not to have worked their way into prices, likely because of pre-tariff inventory stockpiling. The current inflation trend is favorable, but we think it is too early to pass judgement on the impact of tariffs.
Initial jobless claims came in higher than expected in the latest weekly report and the trend appears to be rising, albeit modestly. More color on the labor market is forthcoming in the next Non-Farm Payrolls and Employment Situation Reports, but the positive trend in income is encouraging. Real Weekly Earnings are rising at the fastest pace since the artificial Covid Stimulus jump and have been positive for 24 consecutive months. This is a big reason why consumption has held up despite a collapse in consumer credit. Revolving (i.e., credit card) debt declined year-over-year in March for the fourth consecutive month and is falling at a rate typically associated with recessions. On that front, the Conference Board’s Leading Economic Indicator (LEI) is hovering near levels indicating recession, though the Wall Street consensus forecasts only a 40% probability of recession within the next 12 months[1].
Both survey data and “hard” official economic releases continue to provide a mixed outlook, consistent with a high degree of uncertainty. Businesses may be more circumspect than consumers at this point given the volatility around tariff policy and negotiations as well as the associated difficulty of planning for future demand. New orders for Non-Defense Capital Goods Excluding Aircraft, a key indicator of the investment component of GDP, dropped 1.3% in April, well below expectations and the trend is not encouraging[1].
Tariffs continue to dominate the daily economic news and that seems unlikely to change anytime soon. With a little over a month to go before the end of the “pause,” the International Trade Court declared Trump’s tariffs illegal under the IEEPA followed a day later by an appeals court Stay of the ruling pending appeal. The President then posted that China had violated the recent agreement in Switzerland that reduced tariffs on both sides while detailed negotiations take place. The machinations go on and on underscoring a very challenging environment for business and investors.
Markets are taking this in stride, displaying impressive optimism. One of the obstacles in passing the “Triple-B” was the firm stance of several GOP Reps from high tax states on the issue of the SALT (state and local tax) deduction. The Bill sent to the Senate included an increase in the SALT deduction to $40,000 from $10,000 under current tax law. This is an especially big deal for higher earners in states with high state tax rates and where property taxes are high. The obvious immediate impact is to lower revenue, all else being equal, and increase the budget deficit, which is an important motivation behind the Bill’s critics. But it is supportive of growth, freeing up funds for investment and consumption. What the final Bill looks like is up in the air, but President Trump clearly wants it passed before the tariff pause deadline in July. A lot can happen between now and then.
[1] Source: Bloomberg