Monthly Economic and Investment Outlook

• Data dilemma: There was ongoing debate in April and May between what the soft data was telling investors versus the hard data. Soft data describes how people feel (survey data) while hard data indicates what they do (activity reports). Interestingly, a significant soft data point, the Conference Board’s U.S. Consumer Confidence Index, had its biggest monthly increase in May (+12.3 points to 98) and rebounded from an 11-year low. We will have to wait and see if that translates to activity.
• Interest Rates: The Federal Reserve’s Federal Open Market Committee (FOMC) chose to maintain their target policy rate of 4.25 percent to 4.50 percent. In the meeting minutes, the Committee noted they believe they are “positioned to wait for more clarity on the outlooks for inflation and economic activity.” Higher rates will continue to favor savers versus borrowers.
• Inflation: Core Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, increased +0.12 percent m/m and was up +2.5 percent y/y (the smallest annual advance in 4-years). However, the risk for tariff related inflation is to the upside and will likely keep the Fed from cutting the target rate at their June 18 meeting.

Measures of U.S. Inflation – Year-Over-Year

• Services Sector: The Institute for Supply Management’s Services Index (ISM Services) moved into contraction territory in May (49.9, versus 51.6 in April), as the new orders component (an indicator of future activity) declined to 46.4, versus the prior reading of 52.3, and the prices paid component jumped to its highest level since 2022 at 68.7. The report confirmed that the U.S. service industries are seeing tariff impacts by way of delayed purchases and pass-through costs.
• Manufacturing Sector: The Institute for Supply Management’s Manufacturing Index (ISM Manufacturing) contracted for a third consecutive month in May, coming in at 48.5 (below 50 represents contraction). Bright spots in the report, however, showed that new orders and employment improved and inventory levels decreased (future activity for restocking).
• Trade: The April U.S. trade deficit was -$61.6 billion which was the smallest since 2023 and was a narrowing of 55.5 percent from March’s report. The biggest driver of this was a decline in imports of goods and services by 16.3 percent. Exports increased by 3 percent.

U.S. Trade Balance – Month-Over-Month

• Employment: U.S. nonfarm payrolls for May were +139K, slightly above expectations and showed the labor market is cooling but not cratering. The unemployment rate held at 4.2 percent. Despite the weak ISM Services number, the payrolls report showed hiring in the health care, travel and leisure sectors (+135K jobs for the month), which speaks to the resiliency of the U.S. services sector.

• The global economy continues to have significant bifurcation as countries around the world see their economies moving at different speeds for a variety of reasons. However, only one of the G7 economies is anticipated to move into recession in the next 12 months (Canada).

• Despite several stimulus measures, China’s consumer confidence numbers are near record lows and wage growth is at a record low. This most likely will weigh on consumer activity levels in that country.

China Consumer Confidence Index

• The U.S. trade report showed the importing of consumer goods declined $33 billion in April, as the trade deficit with Ireland dropped from $29.3 billion in March to $9.5 billion (largely due to the pull ahead purchases of pharmaceuticals). The value of imports from China reached the lowest levels since the second quarter of 2020.
• Canada’s trade deficit jumped to the largest on record as Canadian exports dropped 10.8 percent in April. Exports to the U.S. declined by 15.7 percent (autos were down 23 percent) as U.S. tariffs impede demand for Canadian goods.
• Global central banks have generally been lowering interest rates the last 12 months as inflation has come down from post-covid highs (except for Japan). However, the current global trade environment is forcing some to keep interest rates steady as they monitor the trade-related effects on their economies. Others, such as the European Central Bank (ECB) and the Peoples Bank of China, are having to cut to support their economies.

Global Short-Term Rates

• OPEC+ (Organization of Petroleum Exporting Countries) increased its production targets by another 441,000 barrels per day. This is the third monthly increase in a row and will continue to keep pressure on oil prices as supply increases and demand begins to slow.

• The Fed Funds futures market is currently pricing in one rate cut for the year, anticipated in December. This is in line with our expectations, and we expect the Fed to hold rates steady at its June 17-18 meeting.

• The latest employment data and unemployment numbers are healthy enough to allow the Federal Reserve to continue to stay on the sidelines as it monitors the impact of tariffs on inflation. Prospects for preemptive interest rate cuts in the near term are quite low.
• We expect price measures like CPI and PPI to continue to hold up the level of interest rates. Rising rates challenge the federal budget as interest costs account for over 3 percent of GDP, and that will increase as the Treasury refunds maturing securities.
• The primary deficit, which excludes the interest rate burden, adds another 3.5 percent of GDP for a fiscal deficit of 6.5 percent. Given the debt to GDP ratio is 100 percent, the economy needs to grow at 6.5 percent in nominal terms to be fiscally sustainable.
• A yield on the 10-year below 3.5 percent is likely to signal concerns over a recession while a 10-year above 5 percent will be seen as an indication of stress in the U.S. bond market and investors voting on the nation’s projected fiscal path with their feet.
• Credit spreads for both investment-grade and high-yield corporate bond markets have tightened, reversing most of the April widening. However, we believe that corporate credit borrowers will likely need to navigate a structurally higher cost of capital environment, amid a less supportive growth backdrop.

• Neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on a drawn-out easing path. At the same time, U.S. fiscal deficits and debt concern us. At the margin, international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
• Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
• Allocation to short-term Treasury Inflation Protected Securities (TIPS) due to risk of sticky inflation (in short-term) exacerbated by inflationary policies.

• Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
• Neutral International Developed stocks with no exposure to Emerging Markets. We remain concerned about reciprocal tariff policy as it impacts Emerging Markets.
• Exposure to gold to serve as a hedge, in a geopolitically tense global environment, and supported by strong central bank buying.