Credit-risky financial assets performed well again in June as worries over tariffs and other risk factors dissipated
Recent market surveys suggest higher levels of anxiety in the manufacturing sector related to tariffs, but that has yet to translate into material weakness in hard economic data
There have been emerging signs of labor market cooling, but it’s still too soon to diagnose a material shift, at least for most Fed leaders
June was another strong month for credit-risky assets with the Liberation Day turmoil further in the rearview mirror. The S&P 500 generated a 5.08% return last month, bringing the 2-month return to 11.7%. As will be discussed in more detail throughout this commentary, fixed income credit also performed very well in June amid strong investor demand. Recent trading activity would suggest limited market worries about looming tariff risks to growth. However, the July 9th expiration of the 90-day pause of “reciprocal” tariffs for most trading partners presents some uncertainty.
The June Institute for Supply Management (ISM) Manufacturing survey suggests that businesses in that sector may be more anxious at this point than market participants. Within the responses, there were 3.2 companies reducing employee headcount for every one company hiring, one of the worst ratios since ISM began tracking employment comments, according to the report. A sampling of survey responses is provided below (full report can be found at www.ismworld.org):
“Business has notably slowed in last four to six weeks. Customers do not want to make commitments in the wake of massive tariff uncertainty.” [Fabricated Metal Products]
“Middle East unrest as well as unstable long-term tariff positions continue to impact second- and third tier sources, which is applying pressure to material costs. Costs are up 6 percent to 10 percent over budgeted inflation — and the forecast accounted for the volatility expected with the current administration.” [Wood Products]
“The biopharmaceutical space is starting to see more pronounced headwinds: Stock prices have significantly eroded, companies are facing hiring freezes, and so on.” [Chemical Products]
“The tariff mess has utterly stopped sales globally and domestically. Everyone is on pause. Orders have collapsed.” [Machinery]
“Tariff volatility has impacted machinery, steel and specialized components. Also, potential shortages of skilled labor for construction, maintenance and installation.” [Food, Beverage & Tobacco Products]
“Tariffs continue to cause confusion and uncertainty for long-term procurement decisions. The situation remains too volatile to firmly put such plans into place.” [Computer & Electronic Products]
“Tariffs continue to impact material pricing.” [Petroleum & Coal Products]
As we have noted in recent commentaries, soft data (e.g., surveys) don’t always evolve into hard data (actual economic impact), but there is clearly heightened anxiety surrounding trade policy and, to a lesser extent, immigration policies for manufacturers.
Labor Market Cooling?
The ISM survey suggests that firms are increasing layoffs relative to new hiring. In the broader data, we have seen an increase in initial jobless claims and continuing claims in recent weeks. Exhibit 1 tracks both over the last two years. Prior to tariffs, initial claims had trended in a range of 220k-225k, but over the three-week period ending June 6, claims rose to 250k before falling back down to 236k over the following two weeks. Continuing claims, which track the number of people receiving ongoing jobless benefits, rose to 1.974 million for the week ended June 14, the highest since 2021. Initial claims data can be noisy, and it’s not unusual to see claims rise in summer months when school is out.
Exhibit 1
The rise in continuing claims, however, could be a sign of a cooling labor market where the jobless are having a more difficult time finding new employment. Regardless, it is worth watching in the coming weeks, as well as other labor market metrics. By the time this commentary is published, we will have also received another monthly jobs report (June).
This discussion feeds into the Fed’s current dilemma. Two Fed governors (Waller & Bowman) recently voiced support for a July rate cut over the last two weeks. The suggestion from Waller is less surprising given his more dovish slant in recent months, but Bowman voted against the 50-basis point cut last September, the first dissenting vote by a Governor for such action since 1994. President Trump has said he may nominate a successor to Powell, whose term expires next May, as soon as September. If one were the speculating sort, the dovish tone from Waller and Bowman could be seen as auditioning for potential nomination by Trump, who has been very vocal about his desire for rate cuts. However, policy decisions are a committee vote, even if the Fed Chair has power to sway.
During a panel discussion on July 1, Powell wouldn’t rule out a July cut (the market effectively has), but he did say that the Fed would have likely cut rates further in previous meetings this year had it not been for the expansion of tariffs and the consequent increase of inflation expectations. If the labor market weakens further from this point, the Fed’s decision to move forward with a September rate cut likely becomes clearer. The market is currently priced for the next cut in September and 65 basis points (bps) of cuts in total this year.
To download the PDF of this econ only version, please click here.
To continue reading the full month’s market commentary, and to learn more about current market themes, market sectors, sector performances, and applied strategies, log in to the ALM First portal, and select this month’s commentary in the Resource Center.
If you do not have a login and you would still like to access the document, please send your inquiry to info@almfirst.com.
