WEEK ENDING 5/9/2025
- Fed met and held policy steady
- Fed admits tariffs may raise inflation and slow growth
- Admin reached a tariff agreement with the UK (though the House has to approve)
A CITY DIFFERENT TAKE
The Fed met on Wednesday and held short-term interest rates steady (waiting for “hard data” to catch up with the “soft data”).
“Fed meeting recap: Powell rules out a preemptive rate cut to blunt any tariff impact
The Federal Reserve kept interest rates at the target range of 4.25% to 4.5% at the conclusion of its May meeting. The policy-setting Federal Open Market Committee noted that “the risks of higher unemployment and higher inflation have risen.” Fed Meeting Takeaways
This is starting to sound like a rising likelihood of “stagflation” (a combination of stagnant economic growth, high unemployment, and persistent inflation). The China tariffs are beginning to bite:
“‘Cargo volume at the nation’s busiest port will drop by about one-third this week [starting May 5],’ Gene Seroka, executive director of the Port of Los Angeles, the U.S.’s largest container port by import volumes in 2024, tells fDi.” Tariffs Bite
China tariff talks took place over the weekend. The results were a 90-day temporary cut on Chinese imports (30%) and U.S. exports (10%), down from 145% and 125%, respectively. Is this the all clear? We think not. The Chinese are hard negotiators. We do think this is a positive step forward, as do the equity markets, up 2.00% to 3.00% this morning. The bond market is moving in the opposite direction, a good sign for potential growth. The ten-year Treasury security has broached 4.40%. It sure makes Chair Powell, and the Fed look smart. It also highlights the difficulty in making long-term decisions, because the playing field changes at a moment’s notice. There will be lags before the economy fully recovers. Those container ships leaving China take time to reorder, load and not to mention travel to the U.S.
The administration concluded tariff talks with Great Britain (though the House has to approve…well, maybe that’s old-fashioned thinking—so much for checks and balances). extraordinary circumstances.”
“And yet the agreement announced Thursday was, for Britain, a bad deal, not a good deal. Its exports to the U.S. will now face a minimum tariff of 10%, up from less than 2% in 2023, with some exceptions, such as for steel and jet engines. Exports of autos above 100,000 units will face a 25% tariff. Britain will ease restrictions on U.S. beef and ethanol.” What a special relationship
“The two sides said the US had agreed to reduce the import tax on cars - which Trump had raised by 25% last month - to 10% for 100,000 cars a year. That will help luxury carmakers such as Jaguar Land Rover and Rolls Royce, but could limit growth in the years ahead, as it amounts to roughly what the UK exported last year.” UK Car Tariffs
We wonder how the UAW feels about this deal.
CHANGES IN RATES
The Treasury market was a little more subdued this week. Most market participants view the Great Britain trade deal as positive. This weekend, talks with China began—this is the big enchilada. The slope of the Treasury yield curve was stable, 2-10 spreads ended the week at +0.49% (down 0.01% from last week).
The municipal market seems to have found its footing after a wild ride (brought on by seasonally high new issue supply and retail investors exiting for municipal bond mutual funds). The tariff uncertainty didn’t help.
The lower ratios illustrate the municipal bond market’s firmer footing.
Corporate yields followed Treasuries and were higher for the week.
THIS WEEK IN WASHINGTON
Aside from the Fed meeting, the markets were transfixed by the Great Britain trade deal. Next up is the weekend’s discussions with China:
“The U.S. and China on Monday agreed to temporarily suspend most tariffs on each other’s goods in a move that shows a major thawing of trade tensions between the world’s two largest economies.” A Major Trade Breakthrough
On another front, there are some reports that the administration is looking to suspend habeas corpus protections for certain classes of US residents:
“Trump involved in discussions over suspending habeas corpus, sources say
Donald Trump has been personally involved in discussions inside the administration over potentially suspending habeas corpus, a legal procedure that allows people to challenge their detention in court.
It remains unclear whether this is something the administration will actually pursue, and experts say it will likely generate legal challenges.”
Habeas Corpus is defined as:
“Habeas corpus—Latin for “you have the body”—is used to determine if the government’s detention of someone imprisoned is legal, according to Cornell Law School’s Legal Information Institute. A writ of habeas corpus is used in federal courts under civil law to challenge a person’s detention, commonly used by people imprisoned who are challenging the conviction that led to their prison sentence.
When can Habeas Corpus be suspended:
“Amy Coney Barrett, now a Supreme Court justice appointed by Trump, and Neal Katyal, a former acting Solicitor General in the Obama administration, said in a National Constitutional Center interpretation that the Suspension Clause provides that habeas corpus can’t be suspended except in “extraordinary circumstances.” That is, when a rebellion or invasion occurs, and that it’s required by public safety, they said”.
Has Habeas Corpus ever been suspended? It has been suspended four times in our nation’s history:
- President Abraham Lincoln controversially suspended writ privilege nationally early in the Civil War, but Congress subsequently enacted a law permitting suspension in March 1863.
- “… when the Ku Klux Klan overran 11 counties in South Carolina during the Reconstruction era in acts of domestic terrorism.”
- “Later, habeas was suspended in two provinces in the Philippines during a 1905 insurrection.”
- “Most recently, the United States suspended habeas writ in Hawaii after the Japanese bombing of Pearl Harbor that marked the country’s entrance into World War II."
Potentially one less protection
It doesn’t seem to us that current conditions rise to the prior four levels of significance. But what do we know? Chris didn’t do well in his constitutional law class in college.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of May 9 at 2.39%, 8 basis points higher than May 2nd. This number has been slowly creeping up over the last month. The 10-year breakeven inflation rate finished the week at 2.29%, which is 2 basis point higher than last week.
MUNICIPAL CREDIT
As of May 9, the 10-year quality spreads (AAA vs. BBB) were 0.96%—1 basis point higher than last week’s (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade is showing some movement at 1.12%, while high yield is holding steady at 3.31%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, all money market funds were up last week.
Mutual Fund Flows (millions of dollars)
The week of April 30 saw mixed cash flows for bond funds. Since the beginning of the month, municipal bond funds have lost—$9.423B, exacerbating a seasonally weak period of municipal bond performance.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net decrease in inflows this week.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $13+ billion this week. This follows the last three weeks of a large calendar of $10+ billion.
CONCLUSION
It has been an interesting week—the same can be said for the last few. The fixed income markets seem to have settled down. Trade talks with Great Britain were taken as a positive, but working through the appropriate legislation on both sides lies the details where the devil will be. The Fed held rates steady, but commented on the rising stagflation risks (without using the term). Oh yes, there is a new Pope. —An American Pope raised in Chicago, and partially educated at Villanova University (Chris is an alum). That did not help the “Nova Knicks” on Saturday.
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein are available upon request.