Week ended June 13, 2025: inflation moderates, jobs remain solid

WHAT HAS CAUGHT MY EYE THIS WEEK (SO FAR)

Global stock markets have been less volatile and generally seem to be settling into range-bound trading even as sentiment around the ongoing the trade war / tariffs continues to zigzag.  Through the close on Thursday, U.S. stocks have edged higher so far this week and yields on US Treasuries have fallen across the curve off the back of U.S. economic data suggesting moderating inflation and an ongoing resilient U.S. jobs market albeit one that is perhaps beginning to show some cracks.  Safe haven gold rallied back above $3,400/oz on Thursday even as the US Dollar continues losing ground, reaching its weakest level on Thursday since early 2022.  All things shifted overnight though, as Israel bombed nuclear facilities in Iran.  This led to a switch in sentiment to risk-off, with Asian and European equities trading down around 1% this morning, and U.S. futures firmly in the red. Haven assets like Gold and the US Dollar are currently stronger.  

As far as the ebbs and flows of the trade war, the hyperbole coming from the Trump Administration no longer rattles investors because of the combination of a “Trump put” (“TACO” reference) and market guardrails imposed by the bond market.  The trade negotiations with China this week are a case in point.  Trump officials want to scream “success” following meetings held in London, while the Chinese – much more effective at (and able to play) the “long game” – say little and keep their cards close to their chest.  Personally, I see little progress from the US side in that the Chinese have for many years benefited from an unlevel playing field, with tariffs only a component of the overall issue. Things like government subsides putting American companies at an unfair advantage on the global stage, currency manipulation, and theft of intellectual property rights do not seem to be registering in the discussions, at least based on what I am reading.  In fact, as we approach mid-June, Mr Trump seems to only have in hand a framework agreement with the U.K. that is apparently not officially inked, and a similar “conceptual” trade agreement with the Chinese.  Investors are simply saying “so what” now, because the ebbs and flows are an everyday occurrence, and comments from the administration about trade have become less and less relevant, often completely discounted.

Compared to the erratic trade policies that change day-to-day, the focus on economic data commands much more attention from investors.  So far, the feared effects of the trade war in terms of a potential recession and higher inflation simply have not materialised.  I chalk this up to lags in policy, but it is far from certain that these fears will ever come to pass. Reconciling the reasonably benign economic data that is coming from the U.S. with calls from Messrs. Trump and Lutnick for the Fed to lower the Fed Funds rate by 100bps borders on comical, at least to anyone with a good memory and a reasonably decent economic IQ.  The last two times the Fed agreed to emergency rate cuts of this magnitude were in December 2008 at the onset of the Great Financial Recession and in March 2020 as the COVID pandemic gripped the world.  Needless to say, the state of the U.S. economy and financial markets are slightly different at the moment!  Currently, the US is still experiencing above-target CPI (2.8% core YoY for May) and PPI (3.0% core YoY for May), although May data released this week was better than expected, suggesting moderating inflation at both the retail and wholesale level. U.S. payroll data released the first week in June, along with first time jobless claims released this week, also suggest a resilient albeit slightly-weakening U.S. jobs market.   In spite of Mr Trump’s rants about the Fed being too slow, the CME FedWatch Tool is continuing to project two 25bps reductions in the Fed Funds rate in 2025, the first coming in September.  I would consider two reductions in in the Fed Funds rates in 2025 slightly – or shall I say significantly – more credible than anything coming from the Trump administration about monetary policy. 

Lastly, it might be worth noting that the World Bank has followed the OECD in lowering global growth projections in the coming years, attributing this to uncertainty associated with the global trade war launched by the U.S.  You can find the link to the World Bank’s “Global Economic Prospects” report, released earlier this week, here.  The first two sentences of the Executive Summary capture the rationale for the downward revisions perfectly:

“After a succession of adverse shocks in recent years, the global economy is facing another substantial headwind, with increased trade tension and heightened policy uncertainty. This is contributing to a deterioration in prospects across most of the world’s economies.” 

MARKET UPDATE

The week was progressing rather uneventfully, with stocks and bonds both chalking up decent WoW gains until sentiment shifted on a dime overnight Thursday as Israel unleashed its attack on Iranian nuclear infrastructure.  That small distraction aside (sarcasm), investors have by now quite rightly learned not to react in the moment to changes in trade policies coming from the Trump Administration.  Recent economic data has also been slightly better than expected especially in terms of the trajectory (albeit not yet the level) of inflation.  The start of yet another war in the Middle East suddenly changed the calculus, as investors moved out of risk assets like stocks and cryptocurrencies on Friday, and into safe haven assets like gold and the US Dollar.  Having said that, I found it rather surprising that some of the traditional safe haven assets did not see inflows that might have been expected, even as money was leaving stocks.  For example, although yields were lower on US Treasuries WoW, yields actually moved higher 5bps – 6bps across the curve on Friday, an indication that investors were selling – rather than buying – US Treasuries in a risk-off context.  Also, the traditional safe haven US Dollar was only up 0.3% on Friday, not even enough to offset the losses in the preceding four days as the greenback closed down 1.0% on the week (DX-Y).  The asset that benefited the most from the heightened geopolitical uncertainty on Friday was gold, which increased 1.5%, adding to its already impressive 30.8% gain YtD as the safe haven marches towards $3,500/oz.   In fact, the #FT reported in an article last week (“How gold became the world’s refuge from uncertainty”) that gold has now become the second largest reserve asset for central banks (behind the US Dollar), moving ahead of the EUR as you can see in the graphic below.

The rise of gold as a reserve currency reflects the diminished status of the US Dollar, as the erratic trade and other policies of the current administration continue to chip away at American exceptionalism. 

The asset that benefited the most from the rise in Middle East tensions this past week was oil, with global supply potentially coming under threat.  The price of WTI crude oil gapped up 7.2% on Friday and was up 13% WoW.  Should the increase in the price of oil stick, or should prices continue to rise, this would not only be inflationary but would splatter the Trump administration, as has occurred during the past when oil prices have bitten the U.S. consumer.

The tables below provides performance for various periods for the indices and assets tracked by EMC, including global and U.S. stock indices, US Treasuries, corporate bonds, gold, the US Dollar and other assets.