The Fog of Hot War

Israel & Iran

• Given the abundance of belligerent activity in the Middle East over the last two weeks, we will be issuing a separate report recapping the conflict and its effect on geopolitics and the capital markets.

The Fog of [Trade] War

• President Trump left the G7 Summit in Alberta, Canada, on June 16, a day early, to tend to the conflict in the Middle East. His abrupt departure dashed hopes of making meaningful headway on trade deals with other attendees, Canada, the European Union (EU), and Japan.
• The White House downplayed the July 9 “deadline” for enforcing reciprocal tariffs originally announced on April 2’s Liberation Day. The administration said it is focused on negotiating with 17 or so major trading partners, including the EU, Japan, South Korea, and India. Even if deals are struck, substantial tariffs are likely to remain. Trump administration officials have maintained that US trading partners will be subject to a 10% baseline tariff no matter what happens. However, the US Court of International Trade already ruled in May that both the baseline and reciprocal tariffs are illegal. An appeals court has allowed the administration to continue collecting payments while the case moves through the legal system.[2] The upshot is that markets are likely to continue pricing in lower tariff levels than once feared, when all is said and done.
• President Trump said on Friday, June 27, that he was “terminating” all trade talks with Canada due to the latter’s impending implementation of a Digital Services Tax, which would harm large US tech companies. Companies such as Amazon, Alphabet, and Meta could face tax bills of up to $3 billion.[3]Canada is one of America’s largest trading partners.

Economic Data

Inflation

• The Federal Reserve’s key inflation gauge ran slightly above expectations in May. The core personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices, gained 0.2% on the month and 2.7% from a year earlier, the Bureau of Economic Analysis (BEA) reported on Friday, June 27. FactSet estimates were for a 0.1% monthly and 2.6% annual gain.[4]
• It is widely held among economists that tariff-induced inflation is likely to pick up in the second half of the year, which is the main reason why the Fed has been holding interest rates steady rather than cutting.

The Almighty American Consumer

• The US Census Bureau reported on June 17 that retail sales fell 0.9% in the month of May, a larger decline than economists expected. Cars and parts, building materials, and gas stations saw the biggest declines. Clothing and sporting goods/hobby stores were among the gainers. A pullback from previous months’ tariff frontrunning, lower gas prices, and weather-related issues were the likely culprits of the decline.[5]
• The so-called control group of retail sales painted a more positive picture, gaining 0.4% in May from April, in line with expectations. This metric excludes autos, gas, building materials, and restaurant dining to produce a more consistent measure of spending. The control group data is notable because it feeds directly into calculations of gross domestic product (GDP).[6]
• Aditya Bhave, US economist at Bank of America Global Research, noted that total retail spending, particularly among the highest-income households, has yet to react meaningfully to the new tariffs. The overall economy and the almighty US consumer are displaying trademark resilience for the time being.

Housing Market

• The US housing market had nearly half a million more sellers than buyers in April, the largest such gap on record in seasonally adjusted data going back to 2013, according to real-estate brokerage Redfin.[7]

• The additional inventory has yet to produce an uptick in transactions, however. Existing home sales registered a seasonally adjusted annual rate of just over four million in May, the slowest pace for any May since the depths of the Global Financial Crisis in 2009.[8] Home prices are up more than 50% in the past five years, and mortgage rates are holding above 6.5% [9], effectively pricing many would-be first-time home buyers out of the market. Buyers are also feeling economic uncertainty due to the Trump administration’s trade policy, which may be providing another reason to delay large expenditures.
• The S&P CoreLogic Case-Shiller US National Home Price NSA Index reported a 2.7% annual return for April, down from a 3.4% annual gain in March and the slowest year-over-year gain since mid-2023. The US National Index posted a decline of 0.4% on a month-over-month basis after seasonal adjustments.[10] WP sees the home price deceleration continuing until mortgage rates decline significantly, a process which may ultimately be measured in years rather than months.

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