July 14, 2025

“Buy not on optimism. but on arithmetic”

Benjamin Graham

All eyes on the Federal Reserve this week, but first here are the numbers. The S&P 500 was slightly up .9%, the Dow Jones Industrial Average managed a gain .96%, and the Nasdaq added .46%. Internationally, The FTSE 100 was the big winner up 1.34% and the MSCI-EAFE slightly advanced .04%. The 2-Year treasury paid 3.893%, and the 10-Year yield closed at 4.41%.

This week is full of important date, Wednesday will be the Consumer Price Index and Core Producer Price Index (the Fed’s preferred inflation index), and on Thursday jobless claims, retail sales, and homebuilders’ confidence. Finally, this Friday will be consumer confidence and housing starts, all while earning season is beginning.

The Federal Reserve will meet this week and the political pressure on the Fed to cut interest rates is increasing, Federal Reserve Chair Jerome Powell’s comments last week underscored a cautious approach. On July 7, 2025, a Fed paper suggested the risk of near-zero interest rates persists, indicating ongoing economic uncertainty. Powell noted on July 1, 2025, that the Fed would “wait and learn more” about the impact of potential tariffs on inflation before adjusting rates. This cautious stance was echoed in reports indicating the Fed is grappling with mixed signals from surveys and tariff-related uncertainties. Additionally, news outlets reported White House inquiries into Fed renovation costs and the legal authority to remove Powell, (his term is up in 2026) signaling political tensions. Critics argued the current Fed funds rate (around 5.25-5.5%) is too high relative to inflation, stifling growth. Despite this, the Fed remains data-dependent, with no clear signal on imminent rate cuts, and therefore, faces external pressures regarding leadership and policy.

So, what happened in the markets? Last week, U.S. stock markets showed mixed performance amid ongoing economic discussions. The S&P 500 and Nasdaq reached new record highs early in the week, driven by optimism around potential Federal Reserve rate cuts and strong performances in technology stocks. However, by Friday, July 11, 2025, markets faced volatility as producer price data came in higher than expected, raising concerns about persistent inflation. The Dow Jones Industrial Average fell 0.9% last Friday, while the S&P 500 and Nasdaq saw milder declines of 0.6% and 0.4%, respectively. The good news? Small-cap stocks, tracked by the Russell 2000, surged 6.1% for the week, buoyed by expectations of lower interest rates benefiting smaller firms.

And Bonds? Last week, the bond market experienced volatility driven by economic data, tariff concerns, and Federal Reserve expectations. U.S. Treasury yields fluctuated. Municipal bond yields declined slightly, with short-term maturities dropping 4 basis points while long-end yields remained steady. Investment-grade and high-yield corporate bonds, mortgage-backed securities (MBS), preferreds, senior loans, and emerging markets bonds all posted gains. Lower-rated segments outperformed, with high-yield spreads tightening by 5 basis points, while investment-grade spreads widened by 6 basis points. Overall, the bond market reacted to mixed economic signals. Analysts expect continued volatility due to tariff policies, rising U.S. government debt, and uncertainty over Federal Reserve rate cuts. Markets have priced in a potential September rate cut, but expectations have scaled back to two cuts in 2025 from earlier forecasts of three. The yield curve steepened, with investors seeking a higher term premium for long-term bonds amid inflation risks.

Speaking of inflation, inflation showed signs of cooling (CPI at 2.9%), but producer prices raised concerns, also driven by new tariff announcements by the Administration. As Barron’s Sabrina Escobar reports “Tariff fears finally caught up to stocks, snuffing out the S&P 500’s and Nasdaq Composite’s record-breaking streak. All week, the White House has been sending out letters to trading partners with newly set tariff rates, which range as high as 50%. Markets largely shrugged them off and two of the three major indexes hit new highs. But threatening Canada, one of the U.S.’s closest trade partners, with a 35% tariff rate seems to be one step too far. Investors also weren’t loving President Donald Trump’s late Thursday announcement that countries that hadn’t received any letters could face tariff rates of 15% to 20%, a higher rate than the current 10% benchmark on goods. To be sure, the slide is nowhere near as bad as it was earlier this year, when Trump first unveiled his so-called reciprocal tariffs. The new levies’ on-again, off-again nature have made many investors skeptical about taking each announcement at face value, betting that the president will walk back his most drastic announcements. The upside in all of this is that equities have proven time and again their ability to bounce back from the tariff drama. Second-quarter earnings season, which starts next week, may prove pivotal toward determining whether the current rally can pick up steam again.”

What about housing? As of July 14, 2025, the average 30-year fixed mortgage rate is approximately 6.76%, up slightly from 6.67% the previous week, according to Freddie Mac data. The 15-year fixed mortgage rate averages around 6.06%, per Bankrate’s survey. These rates reflect a trend of staying below 7% for 25 consecutive weeks, though recent economic data, including a stronger-than-expected jobs report, has nudged rates upward slightly. (bankrate.comthemortgagereports.com) High rates and prices make homeownership difficult, especially for first-time buyers. Income growth is expected to outpace home price and rent growth slightly, offering some relief. (fanniemae.com)

One final and grossly underreported number, the US manages a budget SURPLUS last month, due to tariff income, a very good sign that the trade and much maligned tariff policies are having a good effect , hence no one in the media will report it.

Mike