Macro
This week brought fresh trade headlines. Trump floated 30% tariffs on the EU and Mexico, while reports suggested he may push for a minimum 15–20% tariff level in future trade deals. Yet despite this tariff overhang, the economic data remain resilient: jobless claims, retail sales, industrial production, housing starts, and regional Fed surveys all beat expectations. Consumer sentiment also improved, and inflation expectations continued to ease, albeit remaining above the levels seen in late 2024.
Global trade dynamics continue to shift toward protectionism, with U.S. tariff rates rising sharply from 2.3% to 13.4% over the past year, and more increases are likely. While some view these as bargaining tactics, surging customs revenues suggest tariffs are becoming a permanent feature of U.S. policy. With little political appetite to reverse course, the global economy is likely to face a more fragmented and less efficient trade environment, which raises long-term risks of higher inflation and slower growth.
Investor focus has sharpened around the Federal Reserve’s rate path following a week of dovish signals and softer economic data. Governor Waller, viewed as a centrist voice on the FOMC, indicated that a July rate cut remains a possibility, citing continued disinflation, early signs of labour market weakness, and a need to look through temporary price pressures from tariffs and to anticipate potential economic weakness. His comments echoed the Fed’s broader caution about overtightening into a slowing economy. However, despite Waller’s openness to easing, markets remain unconvinced, with Fed Funds futures still pricing in only a modest chance of a cut this month and leaning more heavily toward a move in September.
This cautious stance stems from a desire for more confirmation in the data. While recent CPI and PPI figures were reassuring, underlying inflation (particularly in the services sector) remains sticky, and wage growth has not cooled significantly. Powell’s testimony last week struck a balanced tone, acknowledging progress but emphasising that the Fed is not yet ready to declare victory. Political distractions, including calls from Congress to refer Powell to the DOJ for alleged perjury, have added noise but are unlikely to influence policy. For investors, the shifting tone has sparked renewed interest in short-duration fixed income and offered support to rate-sensitive equity sectors. However, positioning remains measured, as all eyes turn to upcoming data, especially next week’s core PCE and further labour market releases, for clearer signals on the timing and magnitude of Fed action.
In line with the market’s growing sensitivity to inflation risks and a more cautious Fed, inflation expectations have started to reprice meaningfully across the swap curve. The 5Y CPI swap had been trading within its established range since early 2023, but it has now broken above its resistance level of 2.58%, reaching 2.62%. This suggests that the market is taking the reflation risk associated with tariffs very seriously. A shorter-term view shows that the 1Y CPI swap has also broken out, currently sitting at 3.44%, while the 2Y is at 2.94%, near recent highs. Much of this short-term inflation push is also correlated with the recent spike in metals markets, including copper (discussed last week), silver, and platinum.
An interesting and underappreciated development is the sharp rise in the amount of collateral held by banks and broker-dealers on their balance sheets. This trend has accelerated over the past two years. According to recent data, collateral balances have now surpassed levels last seen during the GFC. This surge reflects a combination of heightened counterparty risk aversion, increased demand for high-quality liquid assets (HQLA), and the structural impacts of regulatory reforms such as Basel III and U.S. Treasury market changes that emphasise centrally cleared and collateralised transactions.
After years of U.S. regulatory hesitation toward cryptocurrencies, a major shift occurred when Congress passed the GENIUS Act, the country’s first comprehensive crypto legislation, signalling broader acceptance of digital assets, particularly stablecoins. These coins, backed one-to-one by fiat currencies, are gaining attention for enabling fast, low-cost, borderless transactions with near-cash reliability. Supporters, including President Trump, argue that stablecoins could revolutionise commerce and strengthen U.S. leadership in fintech. However, critics warn that the law, shaped by heavy industry lobbying, may lack sufficient consumer safeguards, potentially risking financial instability. Despite ongoing debate, the crypto sector sees this as a landmark victory, with momentum now shifting toward the CLARITY Act, which could further reshape regulatory oversight.
Rates
The 2-year yield fluctuated throughout the week—starting at 3.85%, rising to 3.95% by Wednesday, and then retreating after a series of stronger-than-expected data releases, including robust retail sales, high consumer confidence, and low jobless claims. It ultimately ended the week close to where it began. On the back of this resilient economic data, market expectations for a September rate cut have shifted as the market is now pricing in just 42 basis points of Fed cuts through year-end, down from 50 basis points a week ago.
There is no sense of urgency from the Fed, as the U.S. economy remains strong, with growth still positive—though gradually decelerating-and absorbing the early impact of new tariffs relatively well. The most likely approach ahead appears to be a measured, data-lagging path, rather than a rapid policy pivot. While tariffs may cause a temporary blip in inflation, a potential cooling in the labour market is seen as far more significant. As evidenced last September, the job market remains the key catalyst for Federal Reserve action.
In market chatter, there is increasing debate over whether replacing Fed Chair Jerome Powell would disrupt the bond market. Such a move could undermine confidence in the institutional framework supporting U.S. Treasuries—the world’s safest asset—and potentially introduce an inflation risk premium into the 10-year yield. Betting markets reflect this concern: Polymarket assigns a 21% probability that Donald Trump would remove Powell in 2025, while Kalshi puts the odds of Powell leaving this year at 23%. If Powell were to step down, Vice Chair Philip Jefferson would assume the role temporarily. However, this transition is unlikely to trigger major policy shifts, as the remaining 11 voting FOMC members are expected to preserve the Fed’s current stance.
While the administration argues that borrowing costs will decline over time, changing the Fed Chair is unlikely to have a meaningful impact on long-term rates. Markets remain more focused on inflation dynamics and fiscal discipline than on personnel changes at the Fed.
Borrowing costs for the U.S. government are now the highest since 2007. With $26 trillion in debt and an average interest rate of 3.3% across all outstanding Treasuries, the interest burden has risen significantly, up from an average of 1.7%. At the current rate, annualised interest expense is running at roughly $1.2 trillion. If the average rate were to rise to 5%, the cost would jump to nearly $2 trillion annually.
Deficits have been a persistent feature of U.S. fiscal policy since the 1990s. But for decades, they were largely ignored because falling interest rates kept debt servicing manageable. Even as debt levels rose, interest payments as a share of the federal budget declined, allowing policymakers to focus on employment and growth without immediate concern for fiscal sustainability.
That dynamic has changed. Interest expense is becoming an increasingly dominant part of the federal budget. A few weeks ago, we noted that U.S. interest payments surpassed military spending, triggering what historian Niall Ferguson has called Ferguson’s Law: “Any great power that spends more on debt servicing than on defence risks ceasing to be a great power.” At the current pace, interest payments could soon become the largest single item in the budget.
Another shift that could impact the Treasury market is the passage of the GENIUS Act this week, which regulates and integrates digital assets. At the center of this are stablecoins – digital tokens backed by Treasuries to maintain a 1:1 peg with the U.S. dollar. These programmable, low-cost, and auditable assets aim to reduce transaction costs and may eventually absorb a growing share of demand for Treasuries. However, since they do not pass yield to holders, their primary function remains transactional. As a result, they are unlikely to serve as long-term stores of value or materially shift Treasury demand. Nevertheless, the growing support for stablecoins raises important questions about liquidity, monetary policy transmission, and the financial system’s underlying infrastructure.
Credit
This week saw a few interesting issuances, with both Citi and Wells Fargo tapping the European bond market through the issuance of Reverse Yankee bonds (where U.S. companies raise money in the euro-denominated bond market). Citi’s issuance is the first euro-denominated Tier 2 bond by a U.S. bank since the Global Financial Crisis. The motivation lies in the fact that ECB rates (~2.25%) remain significantly below U.S. Fed rates (4.25–4.5%), creating a yield gap of approximately 200 bps. Furthermore, issuing in euros provides natural currency hedging for U.S. firms with European revenues.
We also see a surge in Reverse Samurai deals as Japanese companies go overseas to borrow. Year-to-date issuance has already hit a record USD 45 billion, surpassing the previous high of USD 41 billion in 2021.
Back in the U.S., the leveraged loan market had its busiest week of the year, with issuance exceeding USD 50 billion. Despite the elevated volume, there are no signs of stress in the credit space. U.S. corporates continue to show remarkable resilience, even amid the growing complexity of global tariffs and policy uncertainty.
That said, spreads remain tight, with U.S. investment-grade credit spreads currently around 2.9%, below their historical floor near 3.3%. This environment demands disciplined security selection and some dry powder to deploy tactically when opportunities arise.
In high yield, selective moves down the credit spectrum are starting to pay off. There is growing dispersion, allowing investors to capture incremental yield without materially compromising credit quality. The upper tier of high-yield continues to offer an attractive carry relative to fundamentals. At current spread levels, positioning should be driven by yield and carry, rather than by expectations of meaningful credit improvement.
Additionally, moving down the capital structure (rather than focusing on credit quality) may prove more effective for enhancing returns. Identifying strong issuers in resilient sectors and taking subordinated positions in their capital stack offers a way to maximise carry without assuming disproportionate risk.
Ultimately, even if interest rates moderate, the overall payout profile for credit investors is unlikely to shift dramatically. In this environment, yield discipline and credit resilience remain the key anchors of portfolio construction.
Equities
In the US equity market the rally was led by big tech, with notable standouts including Tesla (+5.2%) and Nvidia (+4.5%). Technology led the gains with a rise of 2.09%, followed by Utilities up 1.56%. On the downside, Energy dropped 3.86%, Healthcare fell 2.55%, and Materials declined by 1.33%. Broader strength was also seen in Chinese tech, online brokers, auto suppliers, software, engineering and construction firms, major banks, and airlines. Meanwhile, underperformers included managed care stocks, homebuilders, trucking, base metals, chemicals, energy, logistics firms, and credit card companies.
Still, any pullback may be shallow. Institutional investors, who had been positioned defensively for much of the year, have largely missed this rally. April and May saw levels of investor pessimism rivalling those of the global financial crisis and the early COVID era. With macro risks, including tariffs and fiscal debates, as well as uncertainty over Fed leadership, dominating institutional narratives, many asset managers are now scrambling to regain exposure. However, stretched valuations and narrow market leadership remain key concerns.
The equity rally occurred despite a shift in rate expectations. Still, the recent stabilisation in rates after a sharp Treasury selloff offered some support to risk assets. The 30-year yield briefly breached 5% amid growing concerns about debt sustainability and perceived political pressure on the Federal Reserve. Reports circulated about potential efforts to remove Fed Chair Jerome Powell, although Trump later downplayed them. Nonetheless, such developments reinforce investor concerns about central bank independence.
Trump’s renewed focus on the stock market (after months of claiming disinterest)coincides with fresh market highs. During his first term, he now frequently references equity levels as a barometer of success. This personal attachment to market performance has a dampening effect on tariff-related volatility. Investors increasingly view tariff threats as part of his negotiation playbook rather than as firm policy. However, history reminds us that Trump only paused his tariff escalation in 2018 after markets dropped over 20%. With equities now at record highs, there’s little incentive to soften rhetoric, heightening the potential for policy missteps.
Meanwhile, market internals point to a growing divergence beneath the surface. Implied correlations and index-level volatility have reached exceptionally low levels—realised S&P 500 volatility over the past 10 and 20 days sits around 7–8%, translating to average daily moves of ~50 basis points. This calm has been partially attributed to the large quarterly options expiration on June 28 and the quad witching on June 21. However, we are now entering a period of volatility dispersion, where volatility in individual stocks picks up ahead of earnings announcements, even as index volatility remains suppressed. This pattern is evident in the one-month implied correlation index, which tends to bottom before earnings season.
Low trading volumes and narrow market leadership, particularly from Nvidia and a handful of other megacaps, have left the market susceptible to setbacks. Momentum is showing signs of exhaustion, and extended valuations are beginning to raise concerns. The S&P 500 forward P/E ratio now sits in the 98th percentile historically. At the same time, the most shorted stocks have nearly doubled in price since April, and speculative segments like the ARK Innovation ETF have returned to January 2022 levels, which is a sign of stretched sentiment.
Adding to the bullish backdrop are expectations of systematic buying, including a projected $60–70 billion in equity demand from CTAs over the coming weeks. Retail investors have also resumed net buying, and the corporate buyback blackout period is beginning to ease, potentially adding another layer of support.
Technically, both the financial and technology sectors are hitting new highs. U.S. tech dominance has become so pronounced that index providers have had to reclassify certain stocks, such as Facebook, which is now classified in the Communication Services sector, to prevent sectoral imbalance. But such concentration also raises fragility concerns: with gains so narrowly distributed, the market remains vulnerable to reversals if sentiment on AI or megacap tech begins to sour.
In summary, the path of least resistance remains upward; however, the combination of thin participation, compressed volatility, and elevated valuations makes the market increasingly sensitive to negative surprises.