Treasury yields fell amid Fed hawkishness; equities were mixed, commodities volatile. Oil rose on geopolitical risk, gold and Bitcoin declined. Dollar strengthened slightly against the euro.

It was a volatile week for U.S. Treasury bonds, with yields ultimately declining, particularly at the short end of the curve. Despite the Federal Reserve maintaining a hawkish tone—revising its 2025 GDP forecast downward to 1.4% (from 1.7%) and increasing its inflation projection to 3.1% (from 2.8% in March)—market expectations for rate cuts edged higher. Notably, 30-year Treasury bonds have now lost nearly half their value over the past five years, reflecting a more than 400 basis point rise in yields. As a result, nearly half of the gains accumulated over the past four decades have been erased.

Equity markets broadly retreated over the week. Large-cap stocks declined by 0.15%, while small- and micro-cap indices posted modest gains of 0.15% and 0.35%, respectively. The "Magnificent 7" cohort underperformed, slipping 0.55%. Sector performance was mixed: energy led with a gain of nearly 1%, while healthcare lagged, declining by 2.60%.

In currency and commodity markets, the U.S. dollar strengthened 0.30% against the euro but remains relatively weak in broader terms. WTI crude oil rose 2.50% amid escalating tensions between Israel and Iran, raising concerns over potential supply disruptions through the Strait of Hormuz—a critical chokepoint for nearly 20% of global crude oil shipments. While no routes have yet been directly affected, the heightened geopolitical risk continues to unsettle markets. Gold declined by 1.98%, while Bitcoin, despite remaining above the $100,000 mark, ended the week down over 3%.

The Fed held rates steady, with delayed cuts likely. Inflation, weak retail sales, and housing declines signal cooling economic momentum and rising uncertainty.

The Fed kept interest rates steady at 4.25–4.50% in June, signalling caution amid persistent inflation, labour market uncertainty, and geopolitical risks. While the Fed still projects two cuts in 2025, internal divisions and rising inflation forecasts suggest any easing may be delayed until December, potentially requiring a 50bp move. The Fed raised its 2025 core PCE inflation outlook to 3.1% and downgraded GDP growth to 1.4%, indicating a stagflationary trend. Retail sales fell 0.9% in May, marking a second monthly decline, with weakness in autos and discretionary spending pointing to growing consumer caution amid tariff concerns. Some online categories showed resilience, but the broader trend indicates subdued momentum. In housing, May starts dropped 9.8%—the weakest since 2020—driven by multi-family declines, while permits also fell. High mortgage rates, builder pessimism, and rising inventories continue to weigh on sentiment. Despite a brief rebound in new home sales, construction activity is expected to remain muted. Overall, delayed rate cuts, weak consumption, and housing headwinds point to a slower economic outlook.

The Fed held rates steady, still projecting two cuts in 2025, but elevated inflation, labour concerns, and uncertainty likely delay action until December or beyond.

The Federal Reserve left its policy rate unchanged at 4.25–4.50% at its June meeting, maintaining a cautious stance amid a complex and evolving macroeconomic environment. While the updated dot plot still points to two 25bp rate cuts by year-end, the timing has become more uncertain, with growing divergence among FOMC members—seven now anticipate no cuts in 2025. This internal split, combined with elevated inflation forecasts and rising geopolitical risks, suggests that any policy easing is more likely to occur in December, potentially requiring a larger, 50bp adjustment if conditions warrant. The Fed revised its 2025 core PCE inflation projection up to 3.1% (from 2.8%) and sees unemployment rising to 4.5%, alongside a downgrade to its GDP growth forecast from 1.7% to 1.4%—a stagflationary profile driven in part by tariffs and energy-related price pressures. While the control group of inflation data has shown signs of moderation, recent Beige Book commentary highlights widespread expectations of rising costs ahead. Chair Powell reiterated the Fed's data-dependence and acknowledged a wide range of possible outcomes, making a September cut increasingly unlikely given the lag in inflation data availability—October and November CPI reports will be released after the penultimate FOMC meeting. Markets initially reacted with a mild dovish bias, but yields quickly retraced as participants digested the Fed’s more nuanced message. Ultimately, while the Fed maintains a bias toward easing, its actions remain contingent on sustained progress in inflation and labour market rebalancing, meaning rate cuts—if delivered—may come later and possibly more forcefully than previously anticipated.

We expect the Fed to delay rate cuts until December, as persistent inflation—driven by the Iran-Israel conflict and new tariffs—complicates the path to easing.

US retail sales fell for a second month, driven by declines in autos and discretionary spending, as consumers grow cautious amid tariff concerns and economic uncertainty.

US retail sales declined 0.9% month-on-month in May, marking the second consecutive monthly drop and reversing much of the earlier pre-tariff spending surge, particularly in autos, which fell 3.5%. This decline, worse than the expected -0.6%, follows a downward revision of April’s figures to -0.1% from an initially reported +0.1%. The weakness was concentrated in autos, building materials (-2.7%), gasoline (-2%), and food services—including restaurants and bars—which also saw a notable pullback, suggesting consumers are cutting back on discretionary spending. However, categories such as clothing (+0.8%), miscellaneous (+2.9%), and non-store retail (+0.9%) showed resilience, indicating that while overall sentiment is cautious, consumers continue to shop online. While the control group—excluding volatile items like food services, autos, and gasoline—rose 0.4%, indicating some stability in underlying consumption, the broader trend points to growing consumer caution. Households are increasingly concerned about the impact of tariffs on their purchasing power and the outlook for employment, contributing to a subdued consumer confidence environment. With retail sales representing just 42% of total consumer spending, the data suggest that while Q2 may not be entirely negative, overall consumption is likely to remain under pressure, signalling a continued cooling in economic momentum.

We expect weaker consumer spending ahead, as tariff concerns and a softening labour market outlook weigh on confidence, leading households to cut back on discretionary purchases.

Housing starts and permits declined in May amid high mortgage rates, weak builder sentiment, and rising inventories, despite stronger new home sales and increased builder incentives.

U.S. housing starts declined by 9.8% MoM—far below the expected 0.8% drop—marking their lowest level since 2020, largely driven by a sharp pullback in volatile multi-family construction. Building permits also fell 2%, underscoring ongoing weakness in the housing sector amid persistently high mortgage rates. Single-family housing starts remained essentially flat from April but were down 7.3% YoY, while permits declined 2.7% MoM and 6.4% annually, signalling a further softening trend. Builder sentiment in June deteriorated to its lowest level in 13 years (excluding early pandemic dips), with declining optimism across all components of the Housing Market Index (HMI), including a drop in prospective buyer traffic. Despite this weak construction data, April saw unexpectedly strong new home sales, potentially reflecting greater affordability relative to existing homes. The median new home price ($407,200) fell below that of existing homes ($414,000), driven by increased builder price cuts and smaller, more cost-effective construction. In June, 37% of builders reported price reductions—the highest rate since tracking began in 2022—while 62% offered sales incentives. New homes accounted for their highest share of total sales since 2005, though builders continue to grapple with high financing costs, tariff-related uncertainties, elevated inventories, and weakening demand—particularly in key markets like Texas and Florida—pressuring sentiment and likely slowing future single-family home construction.

We expect continued lower activity in the housing sector as high mortgage rates, weak builder sentiment, and elevated inventories weigh on construction and permitting trends.