Week ended June 6, 2025: U.S. growth under scrutiny

WHAT CAUGHT MY EYE THIS WEEK (SO FAR)

Global equity markets trended higher much of the week, largely slagging off weaker-than-expected economic data in the U.S. and ongoing tariff uncertainty. The “on again, off again” approach around trade policy is becoming the new norm. It is reasonably safe to say by now that little of this trade rhetoric can be taken too seriously in any given moment because it changes day-to-day. Having said this, my view is back to one characterised by asymmetric downside risk, at least as far as U.S. equities. U.S. stocks again feel slightly on the frothy side given the ongoing policy uncertainty, signs of a gradually slowing U.S. economy, and unknown effects of the tariff policy – whatever it might be on a given day – on earnings. The S&P 500 trailing P/E is back to 27.5x, and price-to-sales is over 3x again.

As far as fixed income, I continue to avoid duration trades for obvious reasons. I also have some concerns about credit which is visible in high yield. According to the BofA USD HY index, credit spreads for generic high yield bonds increased to +461bps on April 7 (following “liberation day” tariffs) and have since screamed back in to +323bps (Weds close). That is still wider than at the beginning of the year (+288bps), but the direction of travel given the outlook is remarkable, and it makes me wonder if it is too good to be true.

Although U.S. economic data has come in weaker than expected so far this week, European economic data has come in a touch better perhaps, certainly as far as Eurozone inflation slowing to 1.9% (headline, YoY). The data paved the way for another interest rate cut by the ECB on Thursday, its 8th one since pandemic-highs. Attention now turns to the Fed and “too late Powell”, which will be forced to digest the combination of a slowing US economy and slightly worrisome trends in the jobs market versus lingering fears of higher inflation caused by tariffs. As of now, the CME FedWatch Tool is indicating that the Fed will cut twice now this year – in September and in December. Clearly, there is a growing crescendo of investors, and even some economists, joining Mr Trump is saying the time for monetary easing is near.

The OECD (intergovernmental organisation comprised of 38 member countries) released its revised economic projections early this week. Not surprisingly, the OECD cut its global growth projections for GDP in 2025 and 2026 to 2.9%/annum (from 3.3% in 2024), with the U.S, Canada, Mexico and China having their GDP growth reduced the most. (Funny how those are the countries most impacted by the Trump administration trade policies, and not positively!)

The OECD said the following in the introduction to their report, which you can find on the OECD website here:

“The global outlook is becoming increasingly challenging. Substantial increases in trade barriers, tighter financial conditions, weakened business and consumer confidence, and elevated policy uncertainty all pose significant risks to growth. If these trends continue, they could substantially dampen economic prospects. Rising trade costs—particularly in countries implementing new tariffs—are likely to fuel inflation, although this may be partly offset by softer commodity prices. Risks to the outlook remain substantial. Key concerns include further escalations or sudden shifts in trade policies, more cautious behaviour from consumers and businesses, and continued repricing of risk in financial markets. Inflation may also stay elevated for longer than anticipated, especially if inflation expectations continue to rise. On the upside, an early reversal of recent trade barriers could boost economic growth and help ease inflationary pressures.”

It would not be right to end this update without saying something about the escalating feud between President Trump and former head of DOGE Elon Musk. I must admit that I am on the side of Mr Musk when it comes to trashing the House-approved “big beautiful bill”, because it is worsening an already-precarious U.S. fiscal position (meaning deficits will worsen and US debt will increase). However, I am shocked to see this “relationship” break down so quickly, which is a combination of two large egos and a lot of testosterone! Knowing Mr Trump, I suspect he will move to extract a pound of flesh from Mr Musk’s various businesses anyway he can, since the president has a track record of retribution against anyone that does not see things his way. Let’s see if the feud escalates or if they kiss and make up. The GOP will need Musk on-side at the mid-term elections, so my guess is this will settle down rather than escalate.

I will update the Markets section on the website for the week after the close today.

MARKETS LAST WEEK

 Once again, global stock market investors demonstrated last week that they are largely now able to ignore the changes day-to-day (or even more frequently) in trade policies from the Trump administration, looking through this noise to stay the course even when the trade news is unfavourable.  Although some economic data released during the week suggested a slightly slowing U.S. economy, the May jobs report released Friday showed that the jobs market remains relatively resilient.  The U.S. added 139,000 new jobs in May (consensus expectations were for 125,000 new jobs), and the unemployment rate remained at 4.2%.  Of course, this is backwards looking data, but it suggests a U.S. economy that so far has remained relatively resilient to the trade war and the uncertainty this has unleashed.  It certainly validates the Fed’s decision to keep its monetary policy constant for the time being, as the U.S. economy continues to head towards a soft landing. 

Non-U.S. equities largely continue to outperform, although with the recovery of the Mag 7 and other tech-related high-vol stocks, U.S. stocks might be poised to make up lost ground.The roaring ahead of U.S. stocks feels like a momentum / FOMO play, because – as I have said on several occasions – valuations are approaching over-bought levels.  Whether or not this matters remains to be seen.  Momentum/retail investors pile in irrespective of intrinsic value, overwhelming the increasingly limited influence of professional investors that care about things like company fundamentals.  As an investor well long stocks, I say “let the good times roll”, but I continue to be defensive and run hedges.

Corporate credit has also jumped on board the equity-euphoria, with spreads ratcheting tighter now week after week.  This has provided some relief to investors in the fixed income credit space.  However, US Treasuries offer little safety, certainly at the intermediate and long end of the curve.  Yields were higher across the curve last week, as resilient economic data continues to reflect concerns on the horizon regarding future inflation risks, as well as the on-going budget discussions.  I struggle to find anything at all attractive about duration given the landscape.

While Treasuries were taking it on the chin in the second half of the week, the US Dollar managed to hang in there, losing only a modest bit of ground WoW (-0.1%).  This is somewhat of a reprieve as the greenback has been under intense pressure all year as the U.S. exceptionalism trade has faded under Mr Trump.

What remains clear to me is that the real indicators of the future direction of the U.S. economy are the US Treasury bond market and the U.S. Dollar, both suggesting much greater uncertainty ahead than the equity markets are indicating as stocks head “back to the moon.”

The table(s) below provides performance of the indices and assets tracked by EMC for the week just ended.

MARKET TABLES