US Economy: Weekly Commentary – July 21, 2025

US Market Review

Treasury bonds showed mixed results. 10-year yields hit decade lows. Equities gained broadly. The dollar strengthened. Oil fell on EU price caps. Gold declined. Bitcoin rose.

Last week, Treasury bonds showed mixed performance, as longer-duration securities saw rising yields and falling prices. Notably, 10-year US Treasuries posted their worst performance on record over the past decade, delivering an annual return near zero. This indicates that, after adjusting for inflation, investors have faced real losses, highlighting the challenges within this asset class. The US yield curve steepened markedly, driven by a decline in short-term Treasury yields coupled with an increase in 30-year yields. This shift followed remarks from a White House official suggesting that President Donald Trump is likely to dismiss Federal Reserve Chairman Jerome Powell in the near future. However, two-year bond yields rebounded after President Trump clarified that his administration remains “very concerned” but “does not plan to take any action” against Chairman Powell, leading to a modest narrowing of the yield spread.

Equity markets posted broad-based gains, with large-cap stocks rising 0.60%. Small-cap and micro-cap stocks also advanced, up 0.30% and 1.45%, respectively. The “Magnificent 7” outperformed the broader market, climbing 1.70%. Sector performance was mixed: technology led with a nearly 2% surge, while the energy sector lagged significantly, falling more than 3.5%.

The US dollar appreciated 0.55% against the euro. WTI crude oil prices declined 2.09%, impacted by the European Union’s decision to cap Russian oil prices at 15% below normal levels. Additional downward pressure arose from concerns over weakening global demand and increased production from OPEC+. Gold prices fell 0.45%, while Bitcoin gained more than 1%.

Inflation

June inflation was slightly softer than expected, but tariffs are starting to pressure goods prices. Fed remains cautious, watching jobs and housing for disinflation signals.

June’s U.S. inflation data showed a modestly softer-than-expected core CPI increase of 0.228% month-on-month, keeping alive the possibility of a Fed rate cut in September. Headline inflation rose to 2.7% YoY (up from 2.4% in May), while core inflation edged up to 2.9% (from 2.8%), broadly in line with expectations. Beneath the surface, early signs of tariff-related price pressures are emerging in categories such as clothing, toys, appliances, fresh produce, and sporting goods. However, these effects were largely offset by weakness in the shelter component, which accounts for roughly 40% of the core CPI basket, rising only 0.2% MoM, and by falling prices for new and used vehicles, down 0.3% and 0.7% respectively. Interestingly, despite the monthly decline, the used cars and trucks component rose 2.8% YoY in June, marking its highest annual increase since September 2022. Airline fares also declined marginally by 0.1%. While concerns remain that tariffs, especially on autos, could intensify inflation pressures, the full pass-through is expected to emerge more clearly in the July through September data, potentially pushing monthly core CPI prints up meaningfully. President Trump continues to pressure the Fed for aggressive rate cuts, calling for reductions of 200–300 basis points, but most FOMC members remain cautious, mindful of past misjudgments when post-pandemic inflation proved anything but “transitory.” Although two Trump-appointed policymakers, Chris Waller and Michelle Bowman, have expressed openness to earlier cuts, the broader committee sees room to wait, especially in light of June’s stronger-than-expected labour market report. Ultimately, softer wage growth and a cooling labour market, combined with emerging disinflationary signals in housing, expected to gain momentum in late 2025 and early 2026, should help justify a more dovish pivot by year-end.

We expect higher inflation in the coming months due to mounting tariff effects, which could limit the Federal Reserve to just one rate cut, or potentially none, this year.

Industrial Production

U.S. industrial production rose 0.3% in June, led by utilities; manufacturing grew slightly, mining declined, capacity utilization improved but remained below average.

U.S. industrial production increased by 0.3% in June 2025, surpassing market expectations of a 0.1% gain. This followed a revised May figure, which was adjusted from a 0.2% decline to no change, signalling a more stable industrial sector than previously reported; April also remained flat. Manufacturing production, which accounts for approximately 78% of total industrial output, showed modest improvement, rising 0.1% MoM and contributing to an annual growth rate of 0.8%. The growth was largely driven by a robust 2.8% increase in utility output, offsetting a 0.3% decline in mining activity. Capacity utilization edged up slightly to 77.6%, remaining below its long-term average and continuing a downward trend, reflecting ongoing underused industrial capacity. While automotive production exerted downward pressure on overall output, gains in the energy and aerospace sectors helped bolster industrial performance. The year-on-year increase in industrial production now stands at 0.73%, highlighting a gradual but steady recovery in the U.S. manufacturing and industrial landscape, despite lingering challenges such as tariff-related disruptions and fluctuating demand.

We expect U.S. industrial production to sustain moderate growth, driven by strong utilities and manufacturing, despite challenges in the automotive and mining sectors. Tariffs may continue to pressure prices and the industry.

Retail Sales

June retail sales rose 0.6% nominally, but inflation-adjusted spending declined in 2025 due to tariff-driven price hikes, cooling labour market, and weakened consumer sentiment.

June retail sales exceeded expectations, rising 0.6% MoM compared to the 0.1% consensus, with the Control Group, which excludes volatile sectors like autos, building materials, gasoline, and dining out and closely correlates with GDP, increasing by 0.5% versus the anticipated 0.3%. May’s Control Group growth was revised down from 0.4% to 0.2%, aligning overall spending trends with expectations. Although nominal figures appear strong, inflation in core goods has accelerated recently, and when adjusted for inflation, consumer expenditure has been declining throughout 2025, reflecting caution amid rising prices. Notably, nominal auto sales rose 1.2%, contrasting with a decline in vehicle volumes (15.34 million units in June versus 15.65 million in May) and a 0.3% drop in auto prices reported in the CPI. Building materials surged, likely due to preemptive buying ahead of anticipated tariffs, especially amid copper price volatility. The ‘miscellaneous’ category jumped 1.8%, while non-store (online) retail sales saw modest growth of 0.4%. Representing about 42% of total consumer spending, retail sales have largely plateaued in 2025 following strong post-pandemic gains. This stagnation reflects weakening consumer sentiment amid concerns over tariff-driven price hikes, a cooling labour market, and fluctuations in household wealth.

We expect lower real consumer spending ahead as inflation pressures, tariff-driven price increases, and a cooling labour market continue to weigh on household budgets and sentiment.

Consumer sentiment

Consumer sentiment slightly improved but remains below average. Inflation expectations declined yet stay elevated. Consumers remain concerned about future economic and inflation risks.

Consumer sentiment showed minimal change from June, rising slightly by one index point to 61.8, marking its highest level in five months but still remaining 16% below December 2024 and significantly under its historical average. Short-term business conditions improved by approximately 8%, while expectations for personal finances declined by about 4%. Consumer confidence in the economy is unlikely to recover unless there is greater assurance that inflation will not worsen, such as through stabilisation of trade policy in the near term. Current data indicate that recent policy developments, including the newly enacted tax and spending bill, have had little impact on consumer sentiment. Meanwhile, year-ahead inflation expectations declined for the second consecutive month, dropping from 5.0% to 4.4%, and long-term inflation expectations decreased for the third straight month, falling from 4.0% in June to 3.6% in July. Although both measures are at their lowest levels since February 2025, they remain above December 2024 levels, reflecting continued consumer concern about potential future inflation increases.

We expect inflation to remain uncertain. Tariffs are putting pressure on prices, and ongoing trade tensions are contributing to economic challenges.