Labor Market Continues to Surpass Expectations While Inflation Remains Contained
U.S. employers added 147,000 new jobs to the economy in June, well ahead of the 110,000 consensus estimate. The unemployment rate unexpectedly fell to 4.1% and the broader U6 unemployment rate declined to 7.7%. The April and May reports were also revised slightly higher. Average hourly earnings increased 0.2% month over month and 3.7% year over year.
Government employment posted a large gain, leading all categories with an increase of 73,000 due to solid boosts in state and local hiring. In addition, health care was strong, adding roughly 39,000, while social assistance contributed about 19,000.
Source: U.S. Bureau of Labor Statistics
Inflation picked up again in June with headline and core Consumer Price Index (CPI) coming in at 2.7% and 2.9%, respectively. CPI was in-line with expectations and the impact from tariffs was somewhat unclear. Vehicle prices fell while tariff-sensitive areas like apparel and household furnishings rose. Food prices rose 0.3% and shelter prices increased 0.2%. The Fed’s preferred metric, the Personal Consumption Expenditures (PCE) Index, showed headline inflation of 2.3% and core PCE at 2.7%. Tariffs should have an impact but results thus far remain unclear.
PMIs Edge Higher in June – New Housing Supplies Surge Higher
June’s ISM Manufacturing PMI (Purchaser Managers’ Index) edged up to 49.0 from 48.5 in May; recall that numbers less than 50 indicate contraction. Although the production component surged higher, the report showed weakness in new orders and employment. Many companies cited the chaos with tariffs and the Middle East as reasons for recent manufacturing weakness. The ISM Services PMI moved back into expansion territory in June with a reading of 50.8. New orders and business activity strengthened while employment and prices softened.
Sales of new single-family homes dropped 13.7% in May versus the prior month to 623,000 units on a seasonally adjusted, annualized basis. The sales total was 6.3% lower year over year. Slower sales resulted in a significant bump higher in supply with 507,000 new homes for sales at the end of May. This represents a 9.8-month supply at the current sales rate, which is 15% higher than May 2024. Outside of a brief period in summer 2022, supply is the highest it has been since 2009. Nationally, the median price of a new home sold in May was $426,600, up 3.0% year over year. Existing home sales rose 0.8% month over month in May, but fell 0.7% year over year.
Eurozone Continues to Exhibit Sluggish Growth Despite ECB Rate Cuts
The eurozone composite PMI moved slightly higher with a headline June reading of 50.6, up from 50.2 in the prior month. Services hit a three-month high of 50.5 while manufacturing was unchanged at 49.4. Most of the growth over the past few months has come from the manufacturing sector while the service sector has remained largely stagnant. France deteriorated again in terms of activity although Germany rejoined the rest of the eurozone in expansion territory. Current PMIs suggest sluggish growth again for the eurozone economy in Q2.
Eurozone inflation hit the European Central Bank’s (ECB) target of 2.0% in June, up slightly from the 1.9% reading in May. Core inflation, which excludes energy, food, tobacco, and alcohol prices, was unchanged at 2.3% in June. Eurozone inflation has fallen more than the U.S., which has allowed the ECB to cut rates more aggressively over the past year.
Trump’s Tariffs Not Denting Japanese Business Sentiment
Business sentiment among large Japanese manufacturers has improved slightly, according to the recent Tankan survey released by Japan’s central bank. However, worries persist over President Trump’s tariffs. The U.S. has imposed 25% tariffs on auto imports. Japanese automakers have plants in Mexico, where Trump has announced a separate set of tariffs. The U.S. has also imposed 50% tariffs on steel and aluminum. The Bank of Japan (BOJ) has raised its key borrowing rate from 0.1% at the start of the year to 0.5% today.
Sluggish Manufacturing & Services Will Likely Lead to More PBOC Stimulus
China’s manufacturing sector continues to show a mixed bag based on recent PMI readings. The smaller company focused Caixin/S&P Manufacturing PMI came in at 50.4 in June, up from 48.3 in the previous month. The official manufacturing PMI posted a reading of 49.7 in June compared to 49.5 in May. Production and new orders strengthened in June while employment at factories and inventories weakened.
The official non-manufacturing PMI, which includes services and construction, rose to 50.5 in June from 50.3 in May. The services sub-index slipped to 50.1 while construction accelerated to 52.8, driven by infrastructure project spending. The People’s Bank of China (PBOC) continues to emphasize consumption growth as the key to sustainable economic expansion for China over the long run, but that has failed to materialize in a meaningful way in recent years. GDP growth continues to be fueled by infrastructure spending and exports as opposed to consumer spending.
Producer prices are mired in a deflationary spiral that has hurt manufacturers and led to deflation in consumer prices. Additional stimulus appears likely from the Chinese government to boost consumer demand/spending.
Could Earnings See an Upside Surprise Even with Tariffs and Elevated Valuations?
As we embark on the Q2 earnings season, the analyst community expects earnings per share (EPS) growth of 4.8% year over year with the largest increases coming from the Communication Services and IT sectors. Five sectors are forecast to see earnings decline in Q2: Energy, Consumer Discretionary, Materials, Consumer Staples, and Industrials.
Analysts project 9% earnings growth in the S&P 500 in 2025 and 14% in 2026. The index trades at elevated levels today with a forward price-to-earnings (P/E) of 22x, but one could argue that earnings estimates are too pessimistic based on the Q1 beat and lack of impact thus far from Trump’s tariffs.
Actual earnings in Q1 exceeded expectations by ~$4 per share at the index level. All else equal, this should have raised FY estimates by the same amount, but FY estimates were cut by ~$5 with a 2H25 slowdown built into consensus. If growth remains resilient amid higher tariffs, there may be room for some upside surprise in EPS expectations.
Source: MSIM, FactSet, as of 6/13/25
Trump’s Tariffs are Generating Meaningful Revenues to Bring Down Out of Control Deficits
The U.S. economy took in $27.2B in tariff revenue in June, bringing the fiscal year total to $113.3B. In the space of roughly four months, tariffs as a share of federal revenue have more than doubled to around 5% from about 2% historically. Treasury Secretary Scott Bessent has said that tariff revenue could surpass $300B in 2025. Through the first nine months of fiscal 2025, the U.S. deficit increased 5% to $1.337T, largely due to social security, healthcare programs and interest on the national debt. Interest costs on the national debt now exceed all other individual outlays at $921B for the first nine months of the fiscal year, up 6% year over year. The weighted average borrowing costs for the U.S. Treasury have stabilized this year at 3.3% after surging with the rate hiking cycle which began in 2022.
Source: LSEG
Russian Economy is on the Brink of Recession
While Russia’s arms production is booming, its overall economy is showing clear signs it cannot withstand the pressure of war and sanctions indefinitely. For the second consecutive year, Russia’s interest rates have reached record highs, with the Central Bank starting rate increases in July 2024, rising initially from 16% to 21%, and settling at 20% in June this year. Vast amounts of resources have been drained from Russia, from domestic manufacturing to workers. Defense already represents 40% of spending and Putin plans to increase the budget by another 25% in 2026.
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