Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics Including the markets the economy human ingenuity and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, June 27th 2025. I'm Brian Pietrangelo and welcome to the podcast.
And even though we are a week away, we're a little bit early, we are going to wish everybody a happy July 4th for next week on Friday because we will be off that day as well and we will not record the podcast. And as we think about it, we at the almost mark of 250 years of our independence in the United States, going all the way back, obviously, to 1776. So this year we are at year number 249. And I am always reminded of the reason we became independent and fighting for the American people, and although the current environment across the world is not perfect as it could be better, I am always so much appreciative of what we have here in the United States of America, and again remembering what we have is fantastic. So celebrate with family and friends there over the fourth coming up next weekend. Have the hot dogs and apple pie and all the American things that make great. Remember to fly the flag and we look forward to catching up with you next week.
With that, I would like to introduce our panel of investing experts as usual for today, here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic activity, the market had been pretty resilient this week in spite of a wall of worry and geopolitical tensions across the globe. From an economic perspective, we have three key releases to share with you this week. Number one, the overall unemployment claims for the week ending June 21st came down to 236,000. Now that is 10,000 lower than the prior week, but it is more important to give you the information that we had been watching this number because it had been escalating for the prior couple weeks. So seeing the actual decline shows us that the market has remained fairly resilient and is not climbing up to a worrisome level as we look at overall unemployment claims. And second, the final or third estimate for the first quarter of 2025 real gross domestic product showed that the GDP number came in at a minus 0.5% for the quarter. Now this is important because it was revised lower by three-tenths of a percent from 2% down to negative 0.5% for the quarter. And that negative 0.5% does represent a serious drop from the fourth quarter of last year and actually shows the calculation throughput for an increase in imports, which are a subtraction from the calculation of GDP, if you look at the numbers. So ultimately, as we look for the second quarter of 2025 and a rebound in GDP that might be a little bit less affected by the overall tariff implications. We will read that for you as we get more reports coming up in the future And third overall consumer spending and PCE inflation or personal consumption expenditures inflation came in for the month of May just this morning the data was released and we will talk about month over month inflation and we'll specifically talk about core inflation excluding food and energy came in at 0.2% which was one tenth higher than expected and one tenth higher than the previous month. So ultimately that means that inflation continues to remain sticky in spite of the opportunity to come down and we'll talk a little bit more about that from a year-over-year perspective, which shows that on a year over year perspective ending in May, PCE inflation, excluding food and energy otherwise known as core inflation came in at 2.7% year- over-year, which was higher than April's read at 2.6%. So again, it remains sticky in terms of overall inflation and we'll continue to look at how that might affect the overall market as well as the Federal Reserve's policy going forward. And speaking of the Federal Reserve, Jay Powell was in front of Congress with his semi-annual update to the Senate and the House in terms what's happening in the overall environment. We'll get a take on that from Rajeev in terms anything newsworthy in that particular update to Congress. So with that, let's turn to George to get his take on some of the economic data, what else is happening in the geopolitical environment within the world this week, and we will get his read right now. George, what do you have?
George Mateyo [00:05:01] Well, Brian, I guess we have to kind of acknowledge that the hard data is kind of traded down to the soft data, meaning that we've been in this conundrum for the past several months where more softer data has been weakening and the hard data has been holding on. And what we mean by that is that the soft data is generally surveys, anecdotes, and some other things like that that people often look to try and get some early glean and early reading to the economy. And what we've seen is that some of those data sets, some of the surveys have been weighing on overall market sentiment for the past several months, kind of reflected mostly in the job market situation and some other things as well. But generally speaking, up until recently anyway, the hard data was actually holding on pretty well. Well, that's going to sort of change, I think, in the past few weeks or so, where more recently, some of the hard data sets, which are like actual reports, like employment, inflation, so forth, those things have started to soften as well. So we've seen some deterioration in some of economic readings. Not to the point of saying that a recession is imminent, but I do want to acknowledge again that the slowing that we've talked about happening is starting to materialize. And whether or not that actually fully morphs into something more serious is still open for debate, but i think we have to acknowledge nonetheless that the data overall is slowing. More specifically, the numbers out this morning here on Friday suggest that spending actually pulled back probably more than expected in the month of May. Uh we saw some kind of weakness in spending on goods which is not surprising because actually that was maybe one of those sub-sectors of the economy that got a boost uh free tariffs in other words people were probably spending in anticipation of higher prices and now we're kind of normalizing some of that so spending on goods and hard items, durable goods, things that if you kick it, it probably hurts your foot. Those type of things actually saw the weakness. And also the services, which have been more resilient and actually quite strong, actually posted a pretty soft print as well in the sense that the things that people spend on to kind of maybe treat themselves to dinner, those type of things, that actually was up slightly. It was supposed to be a lot more, but it actually wasn't up nearly as much. So those two things combined kind of weighed on the overall spending numbers for the month of May. And that's important because consumer spending, as we've talked about on these calls, is close to three quarters of the overall economic picture. So it's a really of a wave. What that means, I guess, from the headline numbers is that GDP this quarter, you know, I think it's still going to be a pretty decent quarter, but I think a lot of it is just because of the phenomenon I just talked about where we had some pre-buying in the first quarter of this year that kind of normalizes the second quarter. What that means from overall GDP is that imports essentially are going to be down this quarter. That's actually a good thing for GDP in a sense that once we import things, we actually subtract that from GDP. So GDP this quarter is probably going to maybe two and a half, three percent or so. Last quarter, of course, we had a small contraction, but all is equal. We were probably going to see a quarter of close to four or five not two to three percent, but some of the weakness lately has kind of taken those numbers down I think overall. Inflation is still kind of sticky, kind of came coming into the expectations. So inflation is not completely out of the woods and not really kind of completely gone away. So I'm sure we do have some things to say about that as to what the Fed might be thinking. And of course, we pay really close attention to what happens in the labor market, because that's going to be a good read through in terms of further momentum for the economy. And it looks like we are going to see a bit of improvement there from week over week on the initial employment claims. But if you look at longer term unemployment claims. That number is still somewhat elevated close to two million people, meaning those people that have been filing for unemployment insurance and still trying to collect insurance is really quite high. It's actually kind of at a cycle high at roughly two million people overall. And then lastly, in consumer sentiment, it did kind of dip again. We had a bit of a bounce back following the April liberation day news. It did actually recover from that. But then more recently, it has also started to come back down a little bit. So overall, to me, it seems like things are kind of losing some momentum. Not to the point of outright contraction, but nonetheless we have to acknowledge that things are slowing in a pretty notable way. So if you put all of it together, Rajeev, I'm kind of curious to get your thoughts in terms of what the Fed might be thinking with some of the softer data and other things that they might be weighing in terms of further rate cuts or maybe some rate cuts later this year.
Rajeev Sharma [00:09:10] Well, George, the bond market is really viewing the latest inflation PCE data kind of in a lens that the U.S. Is heading into a period of slower growth with inflation remaining stubborn and sticky, as you mentioned. This is a tough combination for the Fed. They insist on sticking with their wait-and-see approach. That's been the narrative from the Fed, from Fed Chair Powell, from many Fed members. But today's number is not a number, the PCE number is not a number that points to stagflation, but inflation has been stuck between this range of 2.5% to 3% for more than a year now. The latest PCE print is back at the lower end of the inflation range. Fed Funds futures are still pricing in a slim chance of a rate cut in July, that's around 20% odds right now, so I wouldn't give it a lot of credence. But the market expectations appear convinced that we're gonna get the first rate cut in September with those odds around 90%. In my opinion, the latest PCE data is not gonna be enough for Fed Chair Powell to change his wait and see approach. So far, the Fed's response has been that if it comes down to growth versus inflation, the Fed is gonna prioritize inflation. And the Fed almost has to prioritize inflation because to bring full employment back into the mix, the Fed has to get inflation in line with its target. The immediate reaction on the inflation data that we saw was that bond yields moved higher. Now, if we think about some other noise in the market, we did see a report that President Trump may announce a Fed share replacement by September or October. Traders are viewing this news as a signal that early rate cuts might be more likely, given that Trump has consistently called for jumbo rate cuts to happen. At the end of last week, traders were pricing in around 50 basis points of rate cuts by year end. That's two rate cuts. Today, they're pricing in around 62 basis points of rate cuts by year-end. Even if Fed Chair Powell completes his term into 2026, the suggestion that the White House is seeking to assert more control over monetary policy, it brings into question the independence of the Fed. The biggest impact to the news report was seen in the US dollar, which went down to its lowest level in three years. Treasury yields viewed the notion that the Fed would become overly politicized as a reason for substantial curve steepening. We haven't seen that substantial curve steepening on the news. For now, what we're seeing is the yield curve has been steepening with front end yields moving lower at a faster pace than back end yields. But that's been driven mostly by investors making their decisions and bets on rate cuts. The two-year Treasury yield is around only 15 basis points away from its lows for the year. The difference between a five-year Treasury yield and a 30-year Treasury yield has jumped over 100 basis points. So that's a very steep level. And that's the widest spread differential that we've seen since October 2021. Meanwhile, if you look at credit spreads, there's really nothing to see here. Investment grade credit spreads have remained unchanged for the week and continue to trade at a very, very tight range. And that's even in the face of a very busy new issue calendar for June. Investors continue to pour money into corporate bonds. There's just not enough supply for investors to meet the demand. And so you're seeing these new deals come to market and do extremely well. High yield credit spreads they continue to move tighter. They're tighter by about 10 basis points this week. We're now down to levels in high yield below 300 basis points. So if you're looking at the credit market and trying to figure out if the credit market is nervous about anything or they're taking a step back that perhaps we're going to have a growth scare or some kind of slow down in growth, you don't see it in the credit spread market. You're seeing spreads at levels that are extremely tight and they continue to grind tighter. We don't any rationale really for why these spreads would go wider. We don't see headlines making them go wider and we don't new issue in supply making it go wider you have to see some kind of defaults happen for somebody to spook the credit market right.
George Mateyo [00:12:56] Well, I think the other thing we have to acknowledge, too, is that we came into this week thinking that the geopolitical situation was going to be quite broad, and again, it's kind of hard just to remind ourselves, I think to some extent, that just a little less than a week ago, people were asking us questions around the fact that maybe the US is going to war. And thankfully, we've come off the boil there, things have definitely subsided on that side. But they haven't gone away entirely and we have to acknowledge the fact that there are still some risks out there from the geopolitical arena. We've also, as I mentioned, seen confidence come down and yet, Steve, stocks are trading now at all-time highs based on some major indices. So how do you deploy that circle? What do you think the market's and where do you think it's going in the future?
Stephen Hoedt [00:13:39] George, you know, I mean, we've we've said for a little while here that it looked like the market wanted to move to all time highs as we moved into midsummer and that this has now come to pass. I mean I think we've got a couple of different things at play here. While we acknowledge that the geopolitical stuff can be disconcerting at times and there's the never ending flow of economic antidotes and news and things like this, that we come back to a couple of things that drive our positive view of the markets. The first thing is when you take a look at that long-term. Trend of earnings. Where earnings go, stocks tend to go. We've said this both in this forum and I think just about every other forum that we've been in for years. And if you take a look at the forward 12-month earnings line for the S&P 500, or guess what, it moved to all-time highs three days ago. So that means we've recovered completely from the decline the analysts baked into earnings numbers from April peak of those numbers to May. Now, the stock market moved ahead of the earnings. It typically does. The market moves to price things before the analysts, who, you know, were all a little slow on the uptake, before the analyst actually marked the earnings numbers down and now the analysts are marking their earnings numbers up. But the point is the trend. The trend is the important thing with these earnings. And the earnings line for the S&P 500 is at a new high. It's really hard to get bearish the market when that earnings line is going up and to the right and making new highs. So yes, there's, you know, people are looking at the hard numbers and these numbers and those numbers, and people talk about recession and this and that, but the S& P 500 doesn't see it when it comes to the forward earnings forecast. Analysts are marking those numbers up, Stocks are going up when that happens, period, the end. So that's the first thing. The second thing is if you take a look at the breadth of the market, we've noticed over the last month and a half that the cumulative advanced decline line for the NYSE had moved to new all-time highs. And historically, you don't see the market turn around on a dime and defy what's happening with the breadth numbers out of the NYSE. That means that market participation in this rally has broadened to the point that But the. Rising tide is lifting more boats, right? And we've seen the S&P 500 benefit from that over the last month to month and a half as this rising tide has taken the market higher. So the rally has, it started out a lot with tech, no doubt. We've been very happy to see the breadth of the rally in terms of leadership change and not just be tech only, but also industrials and some cyclicals We'd like to see it broaden more. I'd love to see financials get involved here. To be honest, but I can't argue with a market that's being led to the upside by cyclicality and has the earnings numbers underlying it suggesting that the trend there is higher as we head into the back half of the year. We think that obviously these new highs are going to persist through July. Seasonal peak for the market tends to be later in the month July. And then just one thing for people to think about, you may not realize it, but July actually, since 1950 has been the best performing month of the year for the stock market. People would think that that could be like November or December or January, but it's not, it's July. So this whole idea of sell in May go away is a bunch of baloney in our view. And we're heading into what looks to us to be a pretty hot summer for stocks.
Brian Pietrangelo [00:17:44] So I will remind everybody a couple of things that we will be off next week for July 4th, but we will be returning to the podcast on 7/11. So Friday, July 11th. So Steve, your comments were great. And I also want to pose a question to George that reminding everybody that the tariff pause 90 day pause that was announced back on April 9th is going to come due on July 9th. So when we return on the 11th, we're probably going to have some pretty good conversation with our audience around what's happening with those tariffs. George, you have any previews of thoughts of what you think might occur?
George Mateyo [00:18:16] Brian, I think you can go in a lot of different directions. And as we've seen from this administration, things can change pretty quickly in many different directions, so I would probably be hesitant to really put a forecast that far ahead with any degree of confidence. But I've seen some overtures in the past few days that suggest that maybe that July 9th date that you suggested is not really a hard date, meaning that we've kind of gotten off that date as the date to fixate on. If anything, it seems like more of a softer target and maybe kind of a moving target event. But positively, as we've seen this morning here, again, Friday at 10:30, roughly. Know, we've seen some positive comments from both the Chinese and the US side regarding our negotiations with China on rare earth minerals and things like that that are key to the negotiations between the two biggest countries in the world. And that's the one that really matters the most, probably. These other countries do matter, not to kind of put anybody in an awkward position or deemphasize one versus the other. But I think what really has to happen is some continued conversation at least between US and China for ethical progress on that front.
Brian Pietrangelo [00:19:21] Well, thanks for the conversation today, George, Steve, and Rajeev. We appreciate your perspectives. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you in two weeks to see how the world and the markets have changed. And provide those keys to help you navigate your financial journey.
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