Fixed Income Update
The bond market was virtually unchanged this week, with most benchmark yields moving only a few basis points in either direction. Whether this reflects investor fatigue from the relentless headlines about tariffs and President Trump’s threats to fire Chair Powell, or simply the lack of market-moving economic data, we suspect that next week will be much more active.
While market attention remained muted, there was some quietly unnoticed movement in a corner of the market that rarely gets coverage. With limited trade deal progress ahead of next week’s August 1 deadline, investors continue to price in the inflationary impacts of tariffs. Treasury Inflation-Protected Securities (TIPS) breakevens – a market-based measure of future inflation expectations – have been steadily rising throughout July. Five-year inflation expectations have climbed from 2.3% to over 2.5% this month, reflecting the market’s belief that inflation will average about 2.5% per year for the next five years. This is the highest level since April’s shock-and-awe Liberation Day tariff announcements.
Despite these elevated inflation expectations, markets continue to price in more than 100 basis points of rate cuts by the end of next year. We see a few reasons why rising inflation expectations remain consistent with a gradual easing path by the Fed:
- If tariffs only lead to a one-off increase in prices, the Fed may feel comfortable cutting rates once the transitory impact fades.
- The Fed could cut rates even as prices rise if there is meaningful deterioration in the labor market.
- Perceived threats to Fed independence can simultaneously boost expectations for both rate cuts and inflation – as we wrote about last week – especially depending on who ends up leading the Fed.
On that note, tensions between the White House and the Fed cooled somewhat this week after President Trump walked back some of his criticism of Chair Powell. After claiming there is no tension between them, Trump told reporters he does not think the Fed’s building renovation is reason enough to fire Powell, adding, “Well, I’d love him to lower interest rates. Other than that, what can I tell you?” There was a brief moment that drew attention when Powell corrected Trump’s claim that renovation costs had risen to $3.1 billion, but overall, Powell’s job appears safe for now.
On the data front, another week of low initial jobless claims reaffirmed labor market resilience, causing a small selloff in Treasuries. Continuing claims remained steady but elevated around 1.96 million. Durable goods orders came in slightly better than expected, though they haven’t moved markets much lately.
Looking ahead, next week will bring the first release of second-quarter GDP along with the Fed’s preferred measure of inflation, PCE. The Fed also meets on Tuesday and Wednesday. While there is virtually no chance of a rate cut, markets will be focused on Chair Powell’s post-meeting press conference.
As of July 25, 2025
|
Index |
Current |
Last Week |
Wk Chg |
Last Year |
Yr Chg |
|
Tax-exempt MMF |
2.61% |
2.17% |
.44% |
3.02% |
-.41% |
|
Taxable MMF |
4.27% |
4.28% |
-.01% |
5.33% |
-1.06% |
|
|
|
|
|
|
|
|
2-Year Treasury |
3.91% |
3.87% |
.04% |
4.43% |
-.52% |
|
5-Year Treasury |
3.95% |
3.95% |
.00% |
4.13% |
-.19% |
|
10-Year Treasury |
4.38% |
4.42% |
-.04% |
4.24% |
.14% |
|
30-Year Treasury |
4.93% |
4.99% |
-.06% |
4.48% |
.44% |
|
5-Year Exp. Inflation |
2.49% |
2.52% |
-.03% |
2.17% |
.32% |
|
|
|
|
|
|
|
|
2-Year Corporate* |
4.26% |
4.25% |
.02% |
4.88% |
-.62% |
|
5-Year Corporate* |
4.51% |
4.51% |
.00% |
4.77% |
-.26% |
|
10-Year Corporate* |
5.13% |
5.16% |
-.03% |
5.15% |
-.02% |
|
30-Year Corporate* |
5.79% |
5.85% |
-.05% |
5.54% |
.25% |
|
|
|
|
|
|
|
|
2-Year Municipal** |
2.56% |
2.53% |
.03% |
2.89% |
-.33% |
|
5-Year Municipal** |
2.70% |
2.66% |
.04% |
2.86% |
-.16% |
|
10-Year Municipal** |
3.55% |
3.50% |
.05% |
2.97% |
.58% |
|
30-Year Municipal** |
5.07% |
5.05% |
.02% |
3.95% |
1.12% |
|
|
|
|
|
|
|
|
10-Year German Govt Bond |
2.72% |
2.69% |
.03% |
2.41% |
.31% |
|
10-Year U.K. Govt Bond |
4.63% |
4.67% |
-.04% |
4.13% |
.51% |
|
10-Year Japanese Govt Bond |
1.60% |
1.53% |
.07% |
1.04% |
.55% |
|
10-Year Spanish Govt Bond |
3.31% |
3.31% |
.00% |
3.24% |
.08% |
|
10-Year Italian Govt Bond |
3.55% |
3.55% |
.00% |
3.77% |
-.22% |
|
|
|
|
|
|
|
|
Fed Funds |
4.50% |
4.50% |
.00% |
5.50% |
-1.00% |
|
Prime Rate |
7.50% |
7.50% |
.00% |
8.50% |
-1.00% |
|
Dollar*** |
$97.72 |
$98.48 |
-$0.76 |
$104.36 |
-$6.64 |
|
CRB |
$304.37 |
$306.12 |
-$1.75 |
$279.69 |
$24.68 |
|
Gold |
$3,336.30 |
$3,358.30 |
-$22.00 |
$2,353.50 |
$982.80 |
|
Crude Oil |
$65.19 |
$67.34 |
-$2.15 |
$78.28 |
-$13.09 |
|
Unleaded Gasoline**** |
$2.09 |
$2.15 |
-$0.06 |
$2.26 |
-$0.17 |
Note: Municipal yields are as of the previous business day.
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon
Stock Market Update
US stocks continued to push higher with the S&P 500 posting several new all-time high closes this week. Through Thursday’s market close, all major US equity indexes traded higher on the week, led by the S&P 500’s 1.06% gain. Some positive updates on the trade front, in addition to a solid start to second quarter (Q2) earnings season, were supportive of gains.
With the August 1st reciprocal tariff deadline looming, and limited recent progress shown on the trade front, trade remained in focus. As the week progressed, some traction developed as trade deals with Indonesia, the Philippines, and most notably Japan were announced. The US-Japan trade deal included a 15% tariff on Japanese imports, down from a 25% rate previously threatened by President Trump. Following the US-Japan agreement, it was reported the US and EU may be close to reaching a deal, which would include a 15% tariff on EU imports; reports noted the US-Japan deal may be pushing the EU towards accepting the 15% tariff rate. In the event a deal is not reached before the deadline, the EU continued to prepare retaliatory measures against the US. Regarding US-China trade, Treasury Secretary Scott Bessent stated the August 12th tariff deadline would likely be extended; the two sides are expected to meet next week. Furthermore, President Trump and China President Xi Jinping could meet in October. While discussions with several US trading partners remain ongoing, trade headlines were overall positive this week and pushed US stocks higher. Investors hope to see additional trade deals announced before August 1st.
Q2 earnings season has thus far been better-than-expected and has been a recent tailwind for US stocks. Per FactSet, blended Q2 earnings growth for the S&P 500 sits at 6.4% vs. expectations for 4.9% growth as of the end of Q2; 80% of S&P 500 companies have posted Q2 revenue and earnings beats. This week’s earnings slate was highlighted by two of the “Magnificent Seven” names, Alphabet and Tesla. The two delivered mixed results with Alphabet posting strong numbers and positive AI commentary while Tesla reported lighter electric vehicle demand with CEO Elon Musk warning of the possibility of “a few rough quarters ahead.” Next week will be very busy on the earnings front with 164 S&P 500 companies set to report quarterly results. Four “Magnificent Seven” are scheduled to report, Amazon, Apple, Meta Platforms and Microsoft; artificial intelligence (AI) monetization and AI capex spending will be investor focuses.
President Trump visited the Federal Reserve on Thursday, touring the construction project with Federal Reserve Chairman Jerome Powell. Trump used the visit to once again press the Federal Reserve (Fed) to lower interest rates. The Fed meets next week and is expected to remain on hold and not lower the federal funds rate. As of Friday morning, the CME FedWatch Tool showed a 97.4% probability that the Fed would remain on hold. Trump noted yesterday that he was not planning to fire Powell; this week Treasury Secretary Scott Bessent also downplayed the likelihood of Powell being fired. Prior threats to fire Powell as Fed Chairman have concerned the market.
Next week brings with it several potential market drivers. A ramp up in Q2 earnings season, the FOMC meeting, and economic data will be in focus. Aside from those items, investors will also be closely watching for any further developments on the trade front ahead of the August 1st reciprocal tariff deadline.
As of July 24, 2025
|
Index |
Current Week |
Month of July |
YTD |
|
Dow Jones Industrial Avg. |
0.81% |
1.44% |
6.05% |
|
S&P 500 |
1.06% |
2.62% |
8.98% |
|
Nasdaq |
0.78% |
3.39% |
9.44% |
|
MSCI EAFE |
2.82% |
2.29% |
22.67% |
|
Russell Mid Cap |
0.83% |
2.98% |
7.96% |
|
Russell 2000 |
0.54% |
3.59% |
1.74% |
