This week has been witness to a veritable inundation of data, including headline macroeconomic reports on jobs, inflation and GDP, another pause decision on interest rates by the Fed, and a bevy of corporate earnings reports of which the top-line message seems to be that nothing is going to stand in the way of the AI narrative and its attendant tsunami of capital spending. Financial markets have powered through this onslaught of numbers with their usual nonchalance – the S&P 500 and Nasdaq stock indexes adding to their record high count, and interest rates mostly staying put around recent averages. Retail investors have poured record amounts of money into equities; among other things, reviving the silliness of the meme stock frenzy that raged through the surreal summer months of 2021.

We’ll have more to say about the stock market and its potentially concerning frothiness in next week’s commentary. Today, though, we try to wade through and make sense of this week’s sea of data. That will be easier said than done.

The Growth Question

Let’s start with the GDP numbers. On Wednesday, we learned that real GDP growth for the second quarter was up by 3.0 percent on an annualized basis, a nice pickup from the slightly negative first quarter and comfortably ahead of economists’ expectations. Upon closer scrutiny, however, the second quarter numbers were distorted by a near mirror image of the factors skewing the first quarter results, all having to do with imports and exports.

The GDP math for imports and exports is relatively straightforward: exports add to GDP and imports subtract from it. In the first quarter, businesses rushed to import the goods they needed before the anticipated tariffs kicked in. Imports grew at a stunning 37.9 percent for the quarter and were the primary reason for the overall Q1 contraction in GDP of minus 0.5 percent.

In the second quarter, the trend went the other way. Imports fell by 30.3 percent. Meanwhile consumer spending, which is the single largest contributor to GDP, grew by 1.4 percent, an improvement over first quarter growth of 0.5 percent. Government spending also increased slightly after falling in the first quarter. All told, the changes were enough to deliver that headline growth rate of 3.0 percent.

But the underlying trends show some cause for concern. The GDP report contains an addendum figure called, unglamorously, “final sales to private domestic purchasers.” Economists refer to this number as “core GDP” – a measure that strips out much of the noise affecting the top line. For the second quarter, core GDP by this figure was 1.2 percent – well below the average of 3.0 percent last year and the lowest since the last quarter of 2022. A slowdown trend by businesses and households alike is becoming visible.

The Fed’s Mandate-balancing Act

The GDP numbers came out Wednesday morning, as did an employment survey by ADP showing another relatively healthy month for the job market (note: we are writing this commentary before the Friday BLS jobs report that will have been published by the time you receive this). These were the final two pieces of data for the Fed to chew over before concluding its Federal Open Market Committee meeting the same afternoon. As expected, the Committee decided to hold the target Fed funds rate at the current range of 4.25 – 4.50 percent, though with two notable dissents from FOMC members Michell Bowman and Christopher Waller, both of whom were appointed during the first Trump administration and who in recent weeks have been outspoken proponents of cutting rates sooner rather than later.

The Fed’s dual mandate is to maintain stable prices while seeking full employment in the economy. The unemployment rate has trended in a relatively tight range on either side of four percent for more than a year, a level commensurate with what most economists would consider to be full employment. Inflation, while not yet having risen by as much as some were forecasting on account of tariff increases, has meanwhile remained stuck at levels meaningfully elevated over the Fed’s 2.0 percent target. The core Personal Consumption Expenditure index, the Fed’s preferred gauge of inflation, was 2.8 percent year-on-year as of the most recent report issued this morning.

The decision to hold rates rather than cut now is, we believe, a correct assessment based on what the data are telling us today. If the employment numbers do change in a meaningfully negative way in the coming months (which was the essence of the arguments put forth by the FOMC dissenters on Wednesday), then a reassessment may be appropriate, come September, when the Committee next meets.

What does all this mean for the market? The other big news segment this week, corporate earnings with a focus on earnings from tech companies, has given a renewed upward push to valuations that have already reached the stratosphere. We’ll share our thoughts on this development in next week’s commentary. We have a lot of data to work with, but still more questions than answers.

There has been a decided thaw in the economic cold war between the US and China. Just last week, megatech chipmaker Nvidia, the first company to reach a $4 trillion market capitalization, got a boost to its already copious fortunes when the government lifted restrictions on its ability to sell its H20 chips to China. Those restrictions had previously forced the company into a $4.5 billion writedown from first quarter results.

More broadly, the lifting of export restrictions for Nvidia reflects a growing sense among investors that the bellicose rhetoric of several months ago is turning into a softer cadence of looking for dealmaking opportunities. That, in turn, is bringing back into play the question of China as an investable opportunity. Front and center in this debate is one of the year’s best-performing stock markets to date: Hong Kong.

The Window on China

Hong Kong’s role as a window on China – a proxy for those unwilling or unable to venture into the mainland itself – goes way, way back. Back to the days when multinational entrepots like Jardine Matheson and Swire’s – the historical inspirations for James Clavell’s saga “Tai Pan” – mediated between the pecuniary interests of foreign investors and the ever-changing faces of Chinese power from emperors to nationalists, red book-waving communists and Deng Xiaoping-era reformists.

That storied history has taken a hit in recent years as the heavy political hand of Beijing weighed on the freewheeling ways of the Cantonese-speaking island. But there are definite signs of a resurgence, not least of all in the form of the Hang Seng stock index thus far in 2025.

Connecting to the Mainland

What’s behind the strong performance of Hong Kong this year, and why is it outpacing mainland Chinese equity indexes, represented in the above chart by the Shenzhen A Share index (green line)? To answer this, it is worth noting that Hong Kong serves as an opportunity for investors in mainland China – both institutions and individuals – to invest in Chinese companies while avoiding the tightly-controlled domestic financial system. They can do this via a mechanism called Stock Connect. Many of the most sought-after Chinese equity names – the likes of tech giants Alibaba and Baidu – are available in Hong Kong via Stock Connect but are not quoted on mainland exchanges.

This year, over $104 billion has been invested into Hong Kong from mainland sources, more than the amount invested over the entire year last year. Perhaps unsurprisingly, this has been happening as new listings by Chinese companies in Hong Kong are also at a record: 208 companies in the first six months of 2025, making Hong Kong the largest IPO market in the world so far this year, with $13.9 billion in deal flow compared to $9.2 billion on Nasdaq, $7.8 billion on the NYSE and less than half a billion in London.

Absent at the Feast

What is missing from this picture – or at least, what is not dominating the picture so far – is meaningful investment flows from origins other than China. This goes back to that question we introduced earlier: is China investable? There have been plenty of reasons for international investors to answer that question in the negative. The Chinese economy has been in the doldrums for years now, with the chronic sickness of its all-important property market and lackluster consumer spending that keeps the economy teetering on the brink of deflation.

But there are longer-term strategic reasons to question this hitherto conventional wisdom. China has a long term strategy predicated on achieving superiority in the so-called industries of tomorrow: artificial intelligence, clean energy and biotechnology, among others. China’s carmaking industry is now world class, particularly in the electric vehicle segment where it is the number one global producer. The fortunes of leading carmaker BYD are rising as those of Tesla are falling. The export-driven economy has managed to withstand the pain inflicted by the trade war – which, as noted above, appears to be softening.

Exposure to Hong Kong equities is not particularly difficult for international investors. Exchange-traded funds like the iShares MSCI Hong Kong ETF – or the MSCI Pacific ex-Japan variant if one wants some added diversification into other regional markets (Singapore, Australia and New Zealand alongside Hong Kong) – are liquid and cost-efficient. The risks are still there, of course. But as a long-term strategy, the China case study is not without merit. Hong Kong, in its time-honored role as a window on China – is a potentially attractive way to gain a foothold.

The Federal Open Market Committee meets again on July 29-30, and the consensus expectation is that the Committee will once again hold the target Fed funds rate at the current range of 4.0 – 4.25 percent. Unlike recent decisions, though, this one may not be unanimous. A small subset of the FOMC’s twelve voting members has been quite vocal in recent weeks about the desirability of a July rate cut. Perhaps unsurprisingly, this strain of Fedspeak has played out in the context of the increasingly strident rhetoric from the White House urging (inadvisably and inappropriately) for interest rates to be slashed. To appreciate why a pause is the right move for the moment, let’s consider a forty year history of FOMC interest rate decisions and the economic conditions in which those decisions were made.

Jobs and Prices

The Fed has two jobs, made explicit in its dual mandate: stable prices and full employment. When a hot economy threatens to unleash higher inflation, it’s time to raise interest rates and cool things off. Conversely, when the unemployment rate starts to trend sharply upwards, then a policy of rate cuts is appropriate as a way to stimulate the economy and generate job growth. Simple, right? Not really. The Fed is not in possession of a crystal ball any more than you or we are. The FOMC has to work with whatever data it has to figure out how dire the situation is and when the right time is to execute the decision. As the chart below shows, however, the Committee has done a pretty good job of this over the past forty years, with each of the four major rate cut cycles coinciding with an economic recession.

Those rate cut decisions, in 1990, 2000, 2007 and 2019 respectively, look even more prescient when considered in conjunction with the employment circumstances of the time. The unemployment rate rose to a maximum level of 7.7 percent, 6.1 percent, 9.9 percent and 14.8 percent over the course of those recessions. The Fed fulfilled its mandate by following policies aimed at bringing unemployment back down (which, in each case, it did).

When the Fed Stayed Put

And then there was the case when the Fed paused. This followed the rate hikes of 1994 (which caught financial markets by surprise), when the Fed took preemptive measures to head off what it feared could be a return of higher inflation. By April of 1995 the Fed funds rate was at 6.0 percent. There was a slight uptick in unemployment a couple months later and the Fed brought rates slightly lower, similar to what the Committee did last September in easing back from the maximum range this cycle of 5.25 – 5.5 percent.

And then – nothing, for two years. In the mid-1990s unemployment continued falling, and growth perked up without an undue amount of attendant inflation. Given the data at hand, the Fed didn’t need to act again until September 1998, when the Russian debt crisis and the ensuing collapse of the Long Term Credit Management hedge fund brought fears of a systemic financial market crash (those fears proved short-lived, and the Fed resumed raising rates in 1999).

And now back to the upcoming July 30 FOMC decision. The unemployment rate is currently 4.1 percent, and it has been close to this level for several months, along with a fairly stable level of gains in nonfarm payrolls. Meanwhile, the core Consumer Price Index rate is 2.9 percent, still meaningfully above the 2.0 percent target rate. In the CPI report that came out this past Tuesday, it was possible to see incipient indications of the tariff effect on certain categories of goods such as apparel and home furnishings. The full inflationary effect of tariffs remains an unknown variable.

In terms of that dual mandate of prices and jobs, then, the data available today continue to support a strategy of “better safe than sorry.” Hold for now, and see what the price and jobs data say as the calendar heads into the next FOMC meeting in September. And please, Fed members, stay away from the toxic politics of it all.

For as long as we have been working in the financial industry, which comprises more decades than we care to let on, people have been worrying about debt and deficits. Throughout this time, though, investors the world over, institutional and individual alike, have been reliable buyers of US government debt. Deficit hawks, fretting over irresponsible Washington spending, turned out to be Cassandras endlessly predicting a financial apocalypse that never happened.

But the debt continued to grow, and so did the size of the deficit. In the 1980s the federal deficit was typically somewhere around one to two percent of GDP; today it is above six percent. In 1985, while we were all bopping out to “Wake Me Up Before You Go-Go” and knocking back Crystal Lite in our leg warmers, the total public debt was about 40 percent of GDP; today, that ratio is near a peacetime high of 120 percent. The conditions have changed, and those beaten-down deficit hawks may be on the cusp of having their told-you-so moment.

A Tale of R and g

In the world of finance, an upper cap R is the symbol for the rate of return, expressed as a yield on an investment, while g (lower cap) signifies the projected long-term growth rate. At the macroeconomic level of national output, these two terms come together in a relationship between the economic rate of growth and the cost of borrowing to obtain that growth, both adjusted for inflation. Long-term solvency is achieved by the rate of growth being higher than the rate of borrowing.

With that in mind, consider the chart below, showing the past three years of real year-on-year US GDP growth versus the yield on 10-year inflation-protected US Treasuries (TIPS).

As the chart shows, the relationship between borrowing costs and growth is extremely close, with inflation-adjusted Treasury yields slightly outpacing real growth rates. In a couple weeks we will get the first reading for third quarter GDP growth, and the current consensus among economists is for growth to be right around the same two percent (year-on-year) level as it was for the second quarter. We show this in the chart with the crimson dotted line.

The Specter of Stagflation

Why is this important? Well, it’s the same as any situation involving debt and income. If you take out a personal loan, your own household finances will be fine as long as (a) you don’t borrow an ungodly sum, and (b) your household income grows at a faster rate than what you pay in interest and principal on the loan every month. If that equation changes – if you lose your job, or your salary flatlines, or you have a variable rate of interest on the loan that suddenly shoots up – then your financial situation is precarious.

Which brings us to the question on everyone’s mind in 2025: what is going to happen to the US economy? If interest rates subside a bit and growth picks up, then the debt situation becomes more manageable. Unfortunately, that does not appear to be the likeliest scenario. The bill that made its way through Congress last week stands to add a substantial amount of debt to the national balance sheet, with an estimated $3.3 trillion addition to the deficit over the next ten years.

Meanwhile, even after backing away from the most outlandish tariffs announced back in April, the average global tariff on goods coming into the US stands at 15 percent, the highest since the Smoot-Hawley tariff era of the 1930s (never a good decade to which to be making economic comparisons). The potential for structurally higher inflation and lower growth – stagflation, in other words – is real, and the probability of this scenario coming to pass is growing by the day.

There are policy prescriptions that could make the stagflation outcome less likely, but we see no evidence of them emerging from the current batch of individuals making economic policy. As for investment portfolios, there is no perfect strategy against stagflation. But it raises the importance, in our view, of a careful and deliberate diversification, across geographies and asset classes for both equities and fixed income. The chips will fall in different ways in different places in the coming months and years. Disciplined asset allocation is about to get a lot trickier, and a lot more important.

The third quarter of 2025 is underway. So far, at least, it has seamlessly picked up the baton from Q2: quiet headline data that fails to make an impact on the Alfred E. Neuman (what, me worry?) market that we talked about in our commentary last week. Today, that headline data point is the monthly jobs report from the Bureau of Labor Statistics. Now, we might have expected this report to land on our desks with all the angst of an awkward middle schooler. Earlier this week a different jobs report, the ADP Employment Survey, showed a net loss in hiring for June, with payrolls shrinking by 33,000 souls. Would the BLS report, where economists expected to see payroll gains of 117,500 and a slight uptick in unemployment to 4.3 percent, also deliver a surprise to the downside?

Nope. The Bureau reported a 147,000 increase in nonfarm payrolls and a small decrease in the unemployment rate to 4.1 percent. Given where we are in the economic cycle, that’s about as tidy a labor market snapshot as one could hope for.

All Roads Lead to Healthcare

Around a third of those nonfarm payroll gains are attributable to one single industry: healthcare. This is consistent with the trend thus far this year; in fact, healthcare is the nation’s top employer, growing from nine percent of the total workforce in 2000 to around 13 percent today. Along with the increase in bodies employed as healthcare workers, their salaries have been rising as well. On average since 1980, wages in healthcare have grown at nearly twice the rate of pay in the rest of the economy. And, in what will come as a surprise to absolutely nobody, American households now spend more annually on health-related expenses than they do on groceries or housing.

So it would not be inaccurate to say that as healthcare goes, so goes the US economy. Which brings us to the other bit of news this week: the tax cut and spending bill that is working its way through the House and has a very high likelihood of arriving on the president’s desk for signing roughly sometime not too long after this commentary appears in your inbox. There is plenty to be concerned about in this bill (to put it mildly), but let’s focus on the bits that pertain to healthcare.

Not Going to Age Well

The American population, like those in most other countries, is ageing. As the country gets older, access to affordable healthcare becomes more important. The bill that is about to become law, however, is expected to make steep cuts to Medicaid and other healthcare subsidies to the tune of around one trillion dollars over the next decade, resulting in somewhere between 12 to 17 million Americans losing their health insurance. Medicaid, which primarily serves lower-income households, makes up around one sixth of total healthcare spending. The spending cuts are likely to weigh heavily on the operations of clinics, hospitals and other providers of services to low-income communities. We expect this will show up, sooner or later, in the jobs numbers that healthcare’s fortunes have kept buoyant for so long. Unfortunately, it is also likely to show up in the statistics showing a country getting sicker as it ages.

The US economy has a history of being remarkably flexible in adapting to changing circumstances. When manufacturing jobs left the country in the 1990s and early 2000s, the growing healthcare industry was able to cushion the blow for anyone willing to trade in production-line skills for training in nursing, lab technician work and the like. We may be approaching another one of those junctures where new doors will have to open as others close. What lies on the other side of those doors, though, remains to be seen.

If you had to put a human face to the performance of financial markets so far in 2025, to whom would that face bear a likeness? Ten weeks ago, a likely answer might have been Donald Trump, whose authorship of the most radical tariff ideas for the US since the Depression-era Smoot-Hawley Act was sending the stock and bond markets into alternating paroxysms of fear and relief. Six weeks ago the answer might have been Scott Bessent, the Treasury Secretary, whose measured comments and apparent ability to navigate a steady course through the crazy tweets and policy reversals provided a balm to soothe Wall Street’s frayed nerves.

What, Me Worry?

Our choice for the Face of 2025, though, is neither Bessent nor Trump, nor Jay Powell nor anyone else in the business of financial policymaking. It is Alfred E. Neuman, the iconic avatar of Mad Magazine, a media publication so old that it evokes fond childhood memories even for those of us now in our sixties. The self-satisfied, gap-toothed grin of Mr. Neuman, beaming out from the cover as we eagerly tore into a new issue replete with the Spy versus Spy feature and inane parodies of whatever the hit movie of the day was, bore the message “What, me worry?”

And that seems to be the Zeitgeist of markets in 2025. Everything matters in the world, from old wars (Ukraine) to new wars (Iran), from gutting scientific research grants to flirting with ever-higher debt and deficits, all while pushing the pedal to the metal in our haste to reach the holy grail of artificial general intelligence (AGI) without having any idea what awaits us when (if) we reach that particular Shangri-la. But here in the land of the Dow Jones Industrial Average and the Barclays US Aggregate Bond Index, it’s summertime and the living is easy. Stocks have now recovered substantially all they lost in the wake of the tariff announcements – the S&P 500 is trading right around its last record high, set on February 19, as we write this, while the yield on the 10-year Treasury note is ambling along around 0.25 percent below where it was when the year began.

Too Big to Fail?

Are we surprised at the extent to which calm has returned to markets, given the extreme tempests of April? A bit, yes, but remember that one of our top-level theses in the annual outlook we published back in January was our expectation that markets would act as a guardrail of sorts against the most outlandish ideas of the new administration finding their way into law. Once investors figured out that this dynamic hadn’t changed from what they remembered of the first Trump administration, it was all well and back to the brandy. The assumption baked into this assessment is that markets are too big to fail and no administration – especially one that considers ultra-wealthy finance types as a core constituent of its political base – is going to let them fail.

And not just with regard to stocks and bonds. Just this morning we had something of a guardrail-imposed walk-back in reaction to events in the currency market. The US dollar dropped like a stone after a media report made the rounds suggesting that the administration might formally nominate a new Fed chair before the end of this summer, which conjured up the notion of a “shadow Fed” skulking behind Jay Powell for months before his term ends in May next year, casting aspersions on policy decisions not in line with the administration’s preference for steep and immediate interest rate cuts, and tarnishing the Fed’s credibility. The White House promptly put out a statement that no such decision was “imminent,” which was enough to claw back some of the losses the greenback had suffered against the euro and other key currencies.

So the first half of the year will end with not much more than a whimper. Will our luck hold in the second half? Maybe – but while the summer breezes might be gentle now, we are heading into that time of the year when the “low-vol, high-vol” dynamic can be at play. In other words, low trading volume with the resulting potential for high volatility. As we noted in our commentary last week, the coming weeks could bring some unwelcome macro surprises in the form of higher inflation, as the tariff effect finally shows up further down the production value chain, and lower growth as dampened consumer sentiment turns into lower spending. Events in the real world are not going to stop pushing and shoving at markets, and there is always a non-zero probability that one thing or another will penetrate that preternatural calm we have been seeing of late.

Relative to how these things can sometimes go, the Federal Open Market Committee’s meeting this week was a bit of a nonevent for markets. The Fed was widely expected to keep interest rates where they have been since last September, with a Fed funds rate upper bound of 4.5 percent, and that is precisely what happened. The FOMC meeting concluded and the trading day ended with not much more than a shrug from the stock and bond markets. But below the headline takeaway of no change in rates, there was plenty to suggest that the central bankers are not particularly happy with what they see in the economy as the second half of the year gets underway.

Dot Plot Tea Leaves

The FOMC’s Summary Economic Projections, colloquially known as the “dot plot,” reflected a change from the previous reading back in March, and the change was essentially in one direction: worse. Inflation is projected to be higher, and so is unemployment, while real GDP growth estimates are lower (bear in mind that these are just estimates, subject to changes in actual conditions not to mention good old fashioned human error). The picture isn’t exactly doom and gloom – the numbers don’t spell out a likely recession – but the median outlook for GDP growth in 2025 is 1.4 percent, down from the March estimate of 1.7 percent. Inflation, as measured by the Core Personal Consumption Expenditure index, is expected to register at 3.1 percent by the end of the year, up from the prior forecast of 2.7 percent.

None of this is particularly surprising, given that the March FOMC meeting took place before the full tariff-related mayhem that kicked off on April 2. But it is a good reminder that, even if we avoid the worst possible outcomes in terms of the tariff policy’s effect, economic conditions are likely to get worse before they improve. And it would not take much for exogenous events – be they another unwelcome tariff surprise, or a shutdown in the Strait of Hormuz that sends crude oil prices into triple digits, or something else entirely that isn’t on anyone’s radar screen today – to push weak economic growth into negative growth. The odds of a recession are lower today than they were on April 3, but they are not zero.

Two, One or None

The FOMC’s median estimate for the Fed funds rate for 2025 reflected two rate cuts between now and the end of the year, the same as the median estimate in March. So, no change, right? Not so fast. The median is simply the number smack in the middle of nineteen individual guesses. In March, four of the nineteen FOMC members projected that there would be no further rate cuts this year. In the June SEP, though, the number of “no more cuts” estimates rose to seven. Which makes sense, given the Fed’s commitment to bringing inflation back to the long-term two percent target, and given that it currently doesn’t see that target being finally reached until 2028.

The Fed meets again in July, but there won’t be another set of Summary Economic Projections until September. We expect the Committee members will have quite a bit of new data to digest between now and then, particularly with regard to inflation. As Fed chair Powell said during the post-meeting press conference on Wednesday (and as we noted in our commentary last week), the full effect of inflation from increased tariffs, which up to now has been relatively quiescent, is likely to come into view during the next several months. By the time the FOMC meets in September they may have a better sense of whether the higher inflation will be more transitory in nature or something to worry about for a longer time frame. If it looks transitory, then the focus will likely turn back to slower growth and higher unemployment, which in turn would give a higher likelihood of at least one, if not two of those rate cuts coming into effect. Either way, this is likely to be a very data-rich summer, with plenty of implications for portfolio positioning.

If you exclude that three-week period in April when the most draconian tariff regime since the beginning of the twentieth century was announced and then promptly reversed (technically put on hold, but does anyone really believe that 46 percent tariffs are coming to Vietnam on July 2?), the first six months of 2025 have actually been pretty humdrum. The S&P 500 is up about two percent from where it was at the beginning of January, while the 10-year Treasury note is hovering right around its average yield of 4.4 percent for this period.

Both stocks and bonds, in other words, seem to be registering a conviction that the worst of the potential economic hit is behind us, with a resumption of something like the cyclical trend that was prevailing prior to the whole tariff kerfuffle: a “soft landing” with growth slowing but remaining positive while inflation settles back to its two percent target. Are the markets correct in their composure, or are they premature in their assumption that all is well and back to the brandy?

Hard and Soft Converge

The optimists have a pretty good case to make simply on the basis of the available data. A few weeks ago we were writing about the divergence between so-called hard and soft data. Surveys such as the Consumer Confidence index, the Michigan consumer sentiment report and the NFIB small business sentiment index all plummeted amid economic uncertainty among households and businesses. The question we asked back then was whether the hard data, headlined by GDP growth, inflation and unemployment, was going to “catch up” with the doom and gloom vibes of the surveys. Now it seems like the trend might be going the other way. The latest Consumer Price Index report came out this week, and it showed core CPI (excluding the volatile categories of food and energy) at 2.77 percent, its lowest level in four years (headline inflation, which includes food and energy, was even closer to the two percent target at 2.8 percent). Last week’s employment report was also mostly fine, with payroll gains a bit better than expected and overall unemployment stable at 4.2 percent (though, as we noted in our report last week, the unemployment rate for recent college graduates is a potential source of concern). Meanwhile, the surveys have been trending up. The latest Michigan sentiment report, fresh off the presses this morning, registered a significant increase from last month and was well ahead of economists’ forecasts. The convergence, in other words, seems to be going in a positive direction.

Where’s the Inflation?

Is it surprising that higher inflation isn’t showing up? After all, despite the administration’s repeated backtracks from the direst of tariff threats, the overall tariff rate for US consumers is still, at around 20 percent give or take, higher than it has ever been since 1934. The rational expectation would be that the higher tariffs beget higher prices. Yet the month-to-month increase in prices from April to May was just 0.1 percent for both headline and core CPI.

The most likely explanation for the non-event of higher inflation to date is that many businesses ramped up inventories before the new tariffs took effect, and thus are able to sell their goods without undue price increases while maintaining stable profit margins. Evidence for this can be seen in the massive drop in imports recently – a 16.3 decrease in April from the previous month. But inventories run out in due time. That is why many economists believe that inflationary pressures won’t really kick in for another month or two, but that consumer-facing prices are likely to be higher towards the end of the summer. Maybe it’s a good idea to get your back-to-school shopping done well in advance of Labor Day weekend.

Another Geopolitical Wild Card

The news this morning of Israel’s large-scale attacks on Iran, targeting nuclear facilities, military sites and the residences of prominent leaders adds another variable to the equation. Generally speaking, markets are quick to regain equilibrium after unexpected geopolitical news breaks – witness for example the resumption in calm of commodity markets within days of Russia’s invasion of Ukraine in 2022. The immediate market reaction today is within the usual bounds – stocks down but not dramatically so, bond yields steady, and oil prices up sharply but retreating a bit from their overnight highs.

We don’t know yet the extent to which Israel intends to continue its attacks, or what its planned end game might be, but there is the potential that it could be a significantly destabilizing event. The World Bank has already projected that global growth will slow in 2025 to 2.3 percent, which is half a percent lower than what the Bank forecasted at the beginning of the year. That forecast is based on an assumption of oil at an average of $66 per barrel – so the implications of structurally higher prices for oil and other commodities do matter.

While we are impressed with the markets’ ability to remain cool, calm and collected in the face of all the first half uncertainty, there is still a long way to go before the end of the year, and plenty of challenges awaiting us around the next bend. This is not a time for relaxing one’s guard.

This week was Jobs Week, when we were afforded a fresh look at employment trends in the US, and the net takeaway was the proverbial mixed bag. The headline number for Jobs Week, of course, is the monthly report from the Bureau of Labor Statistics which contains, among other data points, the national unemployment rate and the gains or losses in nonfarm payrolls. That report, which came out this morning, showed a continuation of slowing payroll gains, the fifth month in a row in which payroll additions grew at a slower pace than the three-year average of 213,000. The overall unemployment rate, meanwhile, remained steady at 4.2 percent.

Earlier in the week, though, observers took note of a notable decline in payroll growth reported by the monthly ADP Employment Survey. This report had jobs growing by only 37,000 versus the consensus forecast by economists of 130,000, suggesting that the long-expected cooling off of the labor market may be further along than we thought. But wait, there’s more! The JOLTS job openings report came in better than expected at 7,391 openings versus the forecast of 7,100.

All in all, then, a mixed bag. But there is an underlying trend going on in the labor market that we think merits closer attention as an indicator of where things generally may be headed.

Graduate Blues

The headline unemployment number has remained remarkably steady over the past year, with one exception. Unemployment for recent college graduates started to spike up at the beginning of this year and rose sharply through the first quarter, as shown in the chart below (the latest data available for this segment is March 31).

As the above chart shows, unemployment for all workers (shown in crimson), for all young workers (green dotted line) and for all college graduates (purple dotted line) did not change much over the 15 months to March 31. But the rate for recent college graduates, which encompasses workers aged 22 to 27 years old, jumped by roughly a full percentage point. Now it is possible, of course, that this is nothing more than a mini-trend that will reverse itself in due course. On the other hand there may be something more durable going on here, and at least some observers imagine that “something” as having to do with AI.

Agentics Versus Alumni

If you happen to have tuned in to any earnings calls by Big Tech companies lately, you would probably have heard the word “agentics” spring forth from the lips of tech execs multiple times. In the world of leading-edge AI, agentics means the implementation of platforms capable of handling a wide range of service-sector functions from customer service to data analytics and the parsing of legal documents. In other words, functions that often align with the job responsibilities of new college graduates. Economists are starting to connect the dots between this relatively recent development in AI and those spiking unemployment numbers for recent grads. A research briefing published last month by Oxford Economics notes that “there are signs that entry-level positions are being displaced by artificial intelligence at higher rates.” As an aside, it’s worth noting that some of the jobs that could get swept up in the agentics revolution are some of the most sought-after for newly-minted holders of bachelor’s degrees, such as investment banking analysts.

That said, it is still too early to infer causation from correlation in observing these trends. A recent article in the Economist, for example, drilled into some of the details underlying this employment trend and concluded that, no, AI was not coming to take away your job.

Not yet, anyway. But that may change as adoption rates of leading-edge AI technology grow among businesses. Use of AI in core business functions is still something that fewer than ten percent of all businesses surveyed say they are doing. That could mean that Big Tech’s promises of what AI can deliver are overhyped and will fall short of projections, or it could mean that we are still in the early stages of an adoption curve that will grow and, at some point, tip into hyperscale across the economy. Meanwhile, keep an eye on those numbers for recent college grads.

Keeping up with the financial news is a tall order in this Year 2025 of the Common Era, which will almost certainly enter the logbooks of history as the Year of Uncertainty. Consider the week that is ending today. It started off, well, just fine, as far as things go these days. Those nasty 50 percent tariffs on goods imported from the European Union that the administration had announced just last Friday were, surprise of all surprises, delayed from a June 2 commencement to July 9. That nice little Memorial Day weekend treat got markets off on solid footing as the week got underway.

Or Was It All Just a Dream?

An actual surprise (as opposed to the government backing away from previously announced tariffs, which at this point should surprise absolutely nobody) came on Thursday morning with the announcement that the US Court of International Trade (did you know that this was a thing prior to Thursday?) had issued a ruling that the government could not use the Emergency Economic Powers Act to unilaterally implement tariffs without Congressional approval. As in – the base line 10 percent tariffs on everyone that were the remnant of the April 2 “Liberation Day” rates, along with the 25 percent hit to otherwise non-compliant goods from Mexico and Canada, and additionally the incremental tariffs on China – were all beyond the reach of the White House’s authority and were to be scrapped. Investors around the world resembled nothing so much as Dorothy, waking up in her bed on the Kansas prairie, staring at Auntie Em and asking, was this all just a dream?

Not so fast, of course, as nothing in Year 2025 can ever simply just be. By the end of the day yesterday an appeals court had issued a stay on the USCIT ruling, meaning that the administration could continue collecting tariffs for now while the US Court of Appeals for the Federal Circuit reviews the lower court’s decision. Which could mean…anything from a green light to an outright ban to a “this is okay, but that is not okay” parsing of the potpourri of tariffs. For businesses trying to plan their strategies, for the poor beleaguered officials whose job it is to actually collect and document tariffs (yes, there are people who do this for a living, and they all deserve some kind of public service medal for their efforts to stay sane when this is all said and done), the uncertainty continues.

899, Not So Fine

And then there was this nugget, buried in the thousand-page tax bill trying to make its way through Congress, that intrepid sleuths dug out for public consideration just this morning: a tax surcharge on foreign investors deemed to be citizens of a country with “unfair tax policies” – a designation encompassing everywhere from most of the EU to Australia, the UK, Canada and elsewhere. Investors from these countries, according to Section 899 of the “big, beautiful bill,” would pay additional taxes of 5 percent per year, up to a maximum of 20 percent, on dividends and interest from US stock and bond holdings (potentially including US Treasuries though the language on this is not clear in the bill).

In other words, for example, a foreign-owned company that wants to avoid punitive tariffs by investing in production facilities in the US could now be punished for that investment in the form of additional taxes on earnings flowing back to the home country. Which seems like a very strange way to reward companies doing what the administration appeared to want them to do in the first place – export less and build more here. This also comes at a time when, as we discussed at length in our commentary last week, the financial position of the US is more reliant than ever on foreign creditors buying our debt. Particularly long-term debt, where demand around the world is slacking and the bond vigilantes are riding high. Weaker demand for US debt will, all else being equal, raise interest rates, which will increase the amount the government spends on interest payments, which is already more than it spends on defense, Medicare and Medicaid.

Will Section 899 make it through all the sausage-making that will take place between now and the bill’s final form? Plenty of evidence continues to suggest that when the market speaks in a loud and unhappy voice, this administration backs off. The market – and its media mouthpieces – are speaking. The Economist magazine observes that Section 899 “would render America all-but-uninvestable for many foreigners.” Uninvestable is normally a term we associate with rickety frontier markets, not the 80 years-plus epicenter of global finance. Our policymakers need to deep-six 899 before it sees the light of day.