Monthly Economic and Investment Outlook

• Volatility? What volatility? That would be a fair question if you took your eyes off of markets at the end of the first quarter and didn’t look at them again until the end of the second quarter. After all, the S&P 500 closed out June at a new record high (more on that later). Of course, we know the quarter and markets did not move in a straight line and there was no shortage of headlines driving volatility. At the end of June alone there was a war between Israel and Iran with U.S. intervention, a historic NATO meeting where member nations agreed to increase spending from 2% of GDP to 5% of GDP, and the U.S. and China announced that they have a trade agreement. Even with all the headlines and volatility, the U.S. economy is still in a good place. Here are some observations. 
• Interest Rates: The Federal Reserve’s Federal Open Market Committee (FOMC) chose to maintain their target policy rate of 4.25% to 4.50%. The June meeting included the Summary of Economic Projections (SEP). FOMC members plotted their expectations for interest rates, inflation and U.S. economic growth (GDP). This time around, the so-called “dot-plots” showed the median expectation for interest rates for 2025 stayed at two possible rate cuts. However, 7 of the 19 members don’t see any cuts at all for 2025. We will have to wait and see if cuts are possible later this year.
• Inflation: The Consumer Price Index for May (reported in June) showed headline inflation was +0.08% month-over-month (m/m) (versus the prior reading of +0.22% m/m and +2.4% year-over-year (y/y). This was softer than expected and showed that despite some pass-through tariff related increases there was some deflation in areas like hospital services, airfares and recreational services.
• Employment: U.S. job opening (JOLTS survey) unexpectedly increased in May to 7.77 million. This is the highest level since November, driven by an increase in openings in leisure and hospitality along with a reduction in layoffs. The U.S. nonfarm payrolls report for June showed 147,000 new jobs were added and the unemployment rate dropped to 4.1%. The labor market continues to be resilient.
• Income and Spending: Personal incomes for the month of May were -0.4% month-over-month versus consensus expectations of +0.8% and personal spending was 0.1% m/m versus expectations of +0.2%. Inflation remained relatively muted, but the overall health of the U.S. consumer will be a focus throughout the summer months.
• Housing: U.S. existing home sales increased slightly by +0.8% to an annualized rate of 4.03 million units, but this was the weakest existing home sales pace in May since 2009. Historically existing home transactions account for almost 90% of all housing transactions in the country. The national median existing home price was +1.3% year-over-year to $422,800. U.S. new home sales dropped 13.7% to a 623,000 annualized rate in May (biggest drop since 2022). New home prices were +3.0% from a year ago at $426,600. The inventory of new homes hit the highest level since 2007 at 9.8 months. High prices and high mortgage rates continue to be headwinds keeping both inventory and sales well below the pre-covid levels.  

• The U.S.’s self-imposed July 9 tariff deadline had countries and financial markets around the world trying to anticipate what will happen before and after the deadline. Several of the U.S.’s largest trading partners have agreed to framework deals, but it is yet to be determined what the overall tariff impact will be.

• Global markets are currently pricing in deadline extensions with many investors assuming the average tariffs will be closer to 10%. These may be reasonable assumptions given what is currently known, however, we would not be surprised to see some negative headlines related to country specific negotiations.
• The 10-member group of countries known as the BRICS (Brazil, Russia, India, China, South Africa, Indonesia, Egypt, Ethiopia, Iran and the United Arab Emirates) may find it particularly difficult to negotiate with the U.S. and as such there will likely be tariff-related headwinds for these emerging economies.
  • The BRICS nations represent 49% of the global population and 27% of global GDP.
• China’s Consumer Price Index (CPI) for May showed disinflation of -0.1% y/y while Producer Prices (PPI) contracted by -3.3% y/y.
• The Bank of England (BOE) may have to reduce or eliminate its current quantitative tightening (selling bonds) as U.K. fiscal policy concerns are now driving interest rates higher as well. This comes at a time when the BOE is cutting interest rates.
• The Eurozone Composite Purchasing Managers’ Index (PMI) came in at 50.2 in June, slightly into expansionary territory. However, within the composite, the services sector was above 50 while the manufacturing sector was 49.4. Eurozone manufacturing has been trending higher recently but has not been in expansion territory for 36-months. Perhaps NATO’s decision to increase spending to 5% of GDP will be the push European manufacturing needs. 

• Eurozone inflation ticked up to 2% year-over-year in June. This is in line with the European Central Bank’s (ECB) target and shows the central bank has done a good job of getting inflation under control.
• OPEC+ (Organization of Petroleum Exporting Countries), plans to increase oil production again in August (+548,000 barrels/day versus previous +411,000 barrels/day). This is the fourth consecutive monthly increase. If there is no significant disruption or change in demand, this increase is likely to create a surplus later this year that should drive oil prices lower.

• Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
• Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
• Exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.

• Interest Rate Expectations: The Fed Funds futures market is currently pricing in three rate cuts for the year with the first expected in September and further cuts expected in October and December. We expect a cut later this year if conditions permit.
• Anticipated Fed Action: The drop in the June unemployment rate from 4.3% to 4.1% is likely to keep the Fed in wait-and-see mode. Hiring in state and local government is what drove the 147,000 new jobs that were created by the economy. Private sector payroll gain of 74,000 was the weakest since last October.
• Fiscal Policy: The OBBBA is estimated by the Congressional Budget Office to increase the deficit by $2.4 trillion over the next ten years before accounting for interest rate costs. The OBBBA also raised the debt ceiling. The fiscal tailwind from the bill should be relatively modest and short-lived.

• Credit Conditions: Spreads in the broad market investment credit index are near a 25-year low. According to Strategas, these are spread levels bond markets have struggled to sustain over a longer period without levered buyers and liquidity in the markets.
• Liquidity Risk: Now that the debt ceiling has been raised, the U.S. Treasury will look to replenish its cash buffer. This will drain liquidity from the system and has the potential to cause disruption, with mortgage-backed security spreads as a leading indicator of this.

Sources: US Treasury Department, Bloomberg

• Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on a drawn-out easing path. At the same time, U.S. fiscal deficits and debt need to be closely monitored. At the margin, international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
• Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
• Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation (in short-term) exacerbated by inflationary policies.