WEEK ENDING 7/25/2025
● Fed ‘almost certain’ to hold rates steady next week.
● When does the tariff effect arrive?
● Trade deal with EU
A CITY DIFFERENT TAKE
The stock market has been experiencing an all-time high and setting new records daily. The momentum seems to favor tariff negotiation and good earnings from corporate America. For the most part, corporate earnings have beaten market expectations on both revenue and net profit margin. Markets are also pricing two full rate cuts for this year, starting in September.
The Federal Reserve is set to meet next week and is almost certain to hold interest rates steady. Chair Powell has been under intense scrutiny from the White House and is facing mounting pressure to lower interest rates. It's widely expected that many Federal Reserve participants will advocate for upcoming rate cuts. Chris Waller and Michelle Bowman, two Trump appointees, have already expressed concerns about employment.
However, even with the reduced pace in hiring, employment remains solid, as we saw with June payrolls exceeding expectations. Payrolls have increased by an average of 130,000 per month in 2025. This is admittedly lower than the 168,000 monthly average from last year. Unemployment is at 4.1%. Average hourly earnings have grown by 4% annually, and real hourly earnings after adjusting for inflation are up by 1% on an annual basis for the month of June.
There continues to be uncertainty surrounding the impact of tariffs on prices and inflation. Some of the rationale behind why we have not seen a drastic impact on inflation has to do with the fact that businesses frontloaded the year by buying and storing inventories. Also, corporations have had flexibility in moving costs across their supply chain for now. It will take some time for the tariff inflation to creep into the economy and for “100% of the cost” to be passed down to consumers in the form of price increases.
We have seen a combined $50 billion in tariff revenue for the last two months, including a record $27 billion in June. This brings the tally to more than $100 billion so far this year, which is a significant number for the economy and will grow over time. We are currently looking at a $30 trillion American economy with a tariff number projected to raise $2.7 trillion over the next ten years.
CHANGES IN RATES
Yields in the Treasury market changed marginally. The 2/10-year Treasury spread is at 44 basis points. The month started with a steeper yield curve at 54 basis points.
Yields in the municipal market were lower throughout the curve. The 2/10 spreads in the muni market this week are 89 basis points.
Treasury-muni ratios got more expensive weekly in the 1/5-year parts of the market.
Investment grade corporate bond yields moved lower week over week.
THIS WEEK IN WASHINGTON
In tariff news, the Trump administration has announced that the U.S. and the European Union have agreed to a deal. The EU will face 15% tariffs. In addition, it will purchase $750 billion in energy from the U.S. while also investing $600 billion here. After the tariff deal with Japan last week, the EU agreement is a significant advance in tariff talks.
Rumors from the South China Morning Post report that the U.S. and China will extend the current tariff pause for another 90 days.
Congress passed the GENIUS Act, legitimizing stablecoins as an asset class. As regulatory changes are bringing clarity to this asset classes, more corporations are demonstrating interest in stablecoin and tokenization. This quarter’s earnings calls reveal firms are engaging in partnerships with stablecoin issuers.
The Washington Post reports that DOGE wants to use an AI tool to analyze federal regulations. The tool would aim to eliminate any regulations that are no longer required by law. However, there are serious concerns about deploying this tool, which may cut 50% of regulations by the first anniversary of Trump’s second inauguration.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of July 25 at 2.35%, which is 3 basis points lower over the period. The 10-year breakeven inflation rate finished the period at 2.44%, 3 basis points higher than the observation on July 18.
MUNICIPAL CREDIT
As of July 25, the 10-year quality spreads (AAA vs. BBB) was one basis point lower than it was for the period ending July 18 at 0.90% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
Investment grade spreads, however, are showing some movement at 0.94%. The high yield spread is lower at 2.72%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market fund flows were higher week over week.
Mutual Fund Flows (millions of dollars)
With the exception of IG, cash flows into bond mutual funds increased for the week.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net inflow over the week.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $11+ billion this week. JPMorgan projects total July issuance to reach nearly $72 billion YTD. 2024’s number for the same period was $25 billion. This explains muni’s underperformance as the market digests all the new issuances.
CONCLUSION
The stock market has been celebrating strong earnings from American corporations. This is driven by tariff deals and their minimal impact on inflation (for now). With the Federal Reserve meeting and the release of PCE inflation prints, this is an important data week. In addition, we will learn about employment numbers on Friday.
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