Weekly Investment Update (06/13/2025)

U.S. equities gave up much of their weekly gains on Friday after Israel intensified strikes on Iranian nuclear infrastructure, raising geopolitical risks and pushing oil prices up 8%. However, unless tensions escalate further, the broader impact on the global economy is likely to be minimal. Meanwhile, progress on trade deals continued after President Trump declared an agreement with China “done,” and said Beijing would resume rare earth exports to the U.S. Nevertheless, we remain cautious about overinterpreting such headlines, as the substance of trade deals has often diverged from initial announcements as seen during the president’s first term.

Inflation data again came in slightly below expectations, with both consumer and producer prices rising just 0.1% month over month — marking the third consecutive downside surprise for both indicators. This has bolstered hopes that the consumer impact of tariffs may be less severe than originally feared. Meanwhile the administration continues to advocate for rate cuts, with JD Vance tweeting that the Federal Reserve is guilty of “monetary malpractice.” Bond markets are now pricing in two 25-basis-point cuts this year.

There was also an improvement in sentiment-driven indicators, which we explore further below. The prior divergence between soft and hard data had raised concerns, so the recent improvement is a constructive development and comes on the back of progress on the tariff front.

Soft Sentiment Data Converging With Hard Economic Data

What is happening: Sentiment data released this week showed signs of a notable recovery in May following headwinds earlier in the year. The Conference Board Consumer Confidence Index rebounded sharply, jumping 12.3 points to 98.0 from 85.7 in April — its largest monthly increase in over four years, following five consecutive months of decline. Similarly, the NFIB Small Business Optimism Index rose to 98.8 in May from 95.8 the previous month, supported by a rebound in the net share of small firms expecting economic improvement. The University of Michigan Consumer Sentiment Index also jumped in June, ending a four-month streak of declines and reaching its highest level since February. The late-month improvement in sentiment was likely aided by the temporary suspension of certain tariffs on Chinese imports, which eased market and consumer anxieties.

In contrast, other economic data showed some signs of softening, as ongoing tariff uncertainty appeared to weigh on demand. Both the ISM and S&P Global business activity surveys hovered near the 50 threshold that separates expansion from contraction. For example, the ISM Services PMI declined to 49.9 in May from 51.6 in April, indicating a slight and unexpected contraction in the services sector — driven largely by softness in new orders and business activity, areas particularly sensitive to policy uncertainty and shifting demand expectations.

Why it matters: Following a period of divergence between hard and soft economic data, we anticipated a convergence that would reflect decelerating but still constructive growth. While recent data has been somewhat volatile, an emerging narrative suggests that the economy, though pressured by tariff-related uncertainties, continues to demonstrate resilience. Notably, the economic impact of tariffs appears to be less severe than initially feared in April.

Historically, soft data, such as business and consumer sentiment, tend to lead hard data. Therefore, recent improvements in soft indicators have been particularly reassuring and have helped ease concerns about a potential economic contraction. Both the Atlanta Fed and New York Fed’s GDP Nowcast models continue to track second-quarter growth above 2%, underscoring the underlying strength of the U.S. economy. With the peak of tariff uncertainty likely behind us and signs of stabilization emerging in softer economic measures, we remain comfortable maintaining our overweight position in equities relative to bonds.

Cooling Inflation in May Tempered by Tariff Uncertainty

What is happening: The May consumer price index (CPI) report was softer than anticipated, with both the headline and core rate rising 0.1% month-over-month. Year-over-year, headline CPI modestly increased to 2.4%, while core CPI held steady at 2.8% for a third consecutive month, though remains at its lowest level since 2021. The downside surprise was driven by easing in core services and energy disinflation, with airfares falling 2.7% and gasoline down 2.6% month-over-month. While shelter inflation still exuded upward pressure, there was a notable easing this month, with both the rent component and owners’ equivalent rent coming in lower than their previous three-month average.

The main surprise from the May CPI print was the weakness in core goods prices, which so far have shown little evidence of pass-through effects from tariffs. Most heavily weighted categories, such as apparel and new vehicles, posted negative month-over-month readings.

Why it matters: Despite encouraging signs of continued disinflation in May, tariff policy remains the greatest source of uncertainty in the inflation outlook. Current price levels still likely reflect excess inventories accumulated ahead of tariff deadlines, making it too early to gauge the full impact on consumer prices. We continue to expect tariff-driven price increases in the coming months; however, uncertainty remains over the extent to which the tariff burden will be passed along to consumer prices versus absorbed by importers and exporters. Federal Reserve Governor Waller recently expressed his view that if tariffs exceed 10%, a larger share of the burden would be passed on to consumers. That said, proactive trade talks with China will likely help alleviate some price pressures, and further incremental progress in shelter inflation could help counter tariff-driven goods inflation.

Absent the tariff uncertainty, the May inflation report would provide further support for the Fed to ease its still-restrictive policy stance. Governor Waller recently reiterated that tariffs should be transitory and largely disregarded in policy decisions — provided that long-term inflation expectations remain well anchored. He also noted that the current divergence between household and market-based expectations has complicated policymaking. As Fed members seek more clarity on tariff policy and its impact on inflation expectations, we believe they will take a cautious approach before resuming rate cuts. Bessemer bond portfolios remain in a longer-duration stance, reflecting our view that rate cuts will resume in the second half of the year.