Economic and Market Overview
July 2025
Equities rose, credit spreads tightened and Treasuries sold off over a month in which President Trump celebrated progress on numerous trade deals and lambasted Chair Powell after the FOMC stuck to its wait-and-see approach as tariffs crept into inflation data.
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Although the rally stalled somewhat late in the month, the S&P 500 still managed to gain 2.2% in July. Equity market strength extended to small caps, however, as the Russell 2000 returned 1.7% after trailing the S&P 500 by 8.0% over the first half of the year. Treasury yields rose by double digits across the curve with the front end leading the way in a slight bear flattening. Credit spreads tightened as the risk-on backdrop was supported by lower-than-usual supply. Regarding the latter, J.P. Morgan reported $80 billion in total investment grade issuance for the month, 18% below the average of the prior four Julys. Oil was down going into the last week of the month, but jumped over the final days as the U.S. imposed further sanctions on Iranian supply and President Trump threatened India with tariffs if it continued purchasing crude from Russia. The Dollar Index rose by 3.2% to end a six-month losing streak but only partially retraced its 10.8% first half decline which marked its worst first half performance since 1973.
Economic Data
The labor market weakened as nonfarm payrolls rose at a 73k pace in July, 31k under consensus, and the prior two months were revised a net 258k lower. That revision marked the largest since March/April 2020. The unemployment rate rose 0.1% to 4.2% though has now printed between 4.0% and 4.2% for 15 straight months. Retail sales rebounded in June with a 0.6% MoM gain following May’s 0.9% decline and both major consumer sentiment indices improved by more than expected in July. Measures of sentiment in the services sector topped estimates, while indices focused on manufacturing were mixed. U.S. GDP followed a 0.5% Q1 decline with a +3.0% pace in Q2, according to the advance release, though tariff frontrunning in the earlier period distorted both figures as net exports went from a significant drag to a significant tailwind. Personal consumption came in 0.1% shy of consensus, printing at 1.4%.
Inflation
Core CPI rose 0.1% in June, below expectations, as higher inflation in core goods was offset by continued disinflation in housing. The impact of tariffs was evident in the prices for core goods less used autos, which rose at a 3.9% annualized rate, the highest since February 2023. Core PCE inflation rose at 0.3% in the month, in line with expectations. Wage inflation as measured by the Employment Cost Index accelerated to a 3.8% annualized rate. Inflation expectations increased, particularly at the front end as 2, 5 and 10-year breakevens finished 19, 17, and 11 bps higher at 2.64%, 2.48% and 2.39%, respectively. The 30-year break rose by only 2 bps to 2.28%.
Federal Reserve
The FOMC left the policy rate unchanged at their July 30 meeting. Two Governors dissented in favor of a rate cut, something that had not happened since 1993. Their dissents seemed to us at least partly motivated by political considerations. Chairman Powell relayed hawkish signals at the press conference, saying that we are still in “quite early days” of tariff inflation passthrough and arguing that downside risks to the labor market are not yet materializing. He chalked up some of the slowdown in job creation to falling labor supply via reduced immigration. And in a soundbite that surely irked some in Washington, he said “you could argue we are a bit looking through goods inflation by not raising rates.” Short rate markets priced a more hawkish path of policy in July, removing 37 bps of cuts from the 2025 path in the month.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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