US Economy: Weekly Commentary – June 30, 2025

US Market Review.

Bonds rose, yield curve steepened. Stocks gained, driven by the Magnificent 7. Dollar weakened. Oil dropped due to increased supply and eased geopolitical tensions.

Bond markets advanced across the curve, with short-term maturities outperforming. Yield curves continued to steepen as investor appetite for 10-year Treasury notes remained subdued. The yield spread between U.S. 10-year and 5-year bonds widened to its highest level since 2021. In global reserve trends, China has significantly increased its gold holdings—from 1.0% in 2015 to 6.5% currently—while reducing its exposure to U.S. Treasuries, which now represent just 22% of reserves, down from 44%.

Equity markets posted strong gains over the week. Large-cap stocks rose 3.45%, while small- and micro-cap stocks advanced by 3.00% and 3.80%, respectively. The “Magnificent 7” cohort surged 5.20%, led by Nvidia, which jumped 10.70% to record highs following positive commentary from CEO Jensen Huang. Sector performance was mixed: communication services led with a 4.70% gain, followed by technology at 4.20%. Conversely, real estate declined 1.70%, and energy fell sharply by 4.10%.

In currency and commodities, the U.S. dollar weakened further, declining 1.72% against the euro. WTI crude oil experienced a steep 13.24% drop—its largest weekly decline since March 2023—driven by increased supply, easing geopolitical tensions, and cautious sentiment. OPEC’s announcement of a planned 411,000 barrels-per-day production increase in July eased concerns over supply constraints. Meanwhile, stability in the Israel-Iran conflict reduced perceived risks to the Strait of Hormuz. Despite a larger-than-expected draw in U.S. oil inventories, mixed demand indicators limited any upward price momentum. Gold declined by 2.90%, while Bitcoin edged higher, gaining 1.90%.

US Market Views Synopsis

The U.S. economy faces slowing growth, persistent inflation, weak consumer spending, and tariff impacts, with one expected rate cut amid cautious business and consumer sentiment.

The U.S. economy contracted by 0.5% in Q1 2025, marking the first decline in three years, driven by a 37.9% surge in imports ahead of new tariffs, weaker consumer spending, reduced government expenditure, and persistent inflation. Personal consumption slowed significantly, while core inflation rose to 3.8%, reinforcing concerns about sustained price pressures. Corporate profits declined, but margins remained near record highs. May data confirmed stagflation, with falling incomes and consumption and inflation exceeding expectations. Structural inflation pressures widened across housing, services, and core goods. In June, business activity softened due to rising tariffs and input costs, export declines, and cautious sentiment, although domestic demand and employment remained strong. Consumer sentiment rebounded 16% in June after six months of declines, yet it remained well below December 2024 levels, reflecting ongoing inflation and trade policy concerns. We expect one Federal Reserve rate cut in 2025 as economic growth slows, but inflation and geopolitical tensions limit further easing.

GDP

The U.S. economy contracted 0.5% in Q1 2025 due to soaring imports, weaker consumer spending, reduced government expenditure, and persistent inflation pressures despite strong corporate margins.

The U.S. economy contracted at an annualised rate of 0.5% in the first quarter of 2025, a sharper decline than the previous 0.2% revision and below market expectations of no change. This marks the first quarterly contraction in three years, reversing the 2.4% growth recorded in Q4 2024. The slowdown was largely driven by a 37.9% surge in imports—the fastest since 2020—which subtracted nearly 4.7 percentage points from GDP as businesses and consumers accelerated purchases ahead of tariffs associated with President Trump’s trade policies. Personal consumption growth was notably revised down from 1.2% to 0.5%, reflecting a significant weakening in consumer spending. Meanwhile, real final sales to private domestic purchasers, a key measure of underlying demand, increased 1.9%, down from 2.9% in the previous quarter and below earlier estimates. Sector data revealed a 2.8% contraction in goods-producing industries and a modest 0.3% decline in private services, partially offset by a 2.0% increase in government output; however, overall government spending decreased by 0.6%. The Core PCE Price Index, a critical gauge of inflation, was revised upward from 3.7% to 3.8%, indicating sustained inflationary pressures that continue to influence Federal Reserve policy considerations. Labour market indicators, including rising jobless claims, suggest a softening employment environment that may further dampen consumer demand. Corporate profits declined by $91 billion in Q1, with domestic non-financial sectors down $69 billion and international operations down $38 billion, partially offset by a $17 billion increase in domestic financial profits. Despite these declines, corporate profit margins remained near record highs at 13.1% of GDP, reflecting resilience amid rising costs, tariffs, wages, and interest rates. Real gross domestic income edged up 0.2%. Collectively, these data underscore the multifaceted challenges facing the U.S. economy, marked by trade disruptions, subdued domestic demand, and persistent inflation, which continue to weigh on near-term growth prospects.

We expect one 25 basis point rate cut by the end of 2025 as the economy slows and consumer spending weakens; however, persistent inflation—exacerbated by rising energy prices due to ongoing conflicts—limits further easing.

Inflation

U.S. data shows falling income and spending alongside stubborn inflation, signalling stagflation. Markets rally on sentiment, but fundamentals will eventually pressure earnings and valuations.

May’s U.S. economic data paints a clear stagflationary picture: personal income fell by 0.4% (vs. +0.3% expected), the first decline since September 2021, driven by a 2.2% drop in government transfers and a 2.3% fall in self-employment income. Personal consumption declined by 0.1%, missing forecasts and reflecting weakening household demand. Meanwhile, inflation remains persistently high. Headline PCE rose 0.14% MoM and 2.3% YoY (up from a revised 2.2%), while Core PCE increased 0.18% MoM (rounded to 0.2%) and 2.7% YoY—above expectations. Structural inflation pressures are broadening: housing services contributed +0.23pp above their pre-pandemic average, non-housing services +0.59pp, and core goods—once deflationary—are now +0.27pp above their 2011–2019 norm. The Supercore index (services excluding housing and energy) also ticked up to 3.12% YoY. On the labour side, private-sector wages accelerated to 4.6% YoY (highest since Dec 2024), while public-sector wage growth decelerated to 5.2%, its lowest since October. Most strikingly, Social Security transfer payments plunged 7.3% in June—the sharpest drop since 1971—and the savings rate fell sharply to 4.5% of disposable income. Despite this toxic mix of slowing activity and sticky inflation, markets continue to rally on sentiment and geopolitical “deal” optimism. But eventually, fundamentals—sluggish growth, elevated inflation, and deteriorating consumer health—will show up in earnings and asset prices.

We anticipate a stagflationary environment characterized by subdued consumer spending, persistent inflationary pressures, ongoing tariff impacts, and geopolitical risks in the Middle East—with monetary policy likely to deliver only one rate cut this year.

Business Sentiment

U.S. economic growth slowed in June, driven by rising tariffs and inflation, stronger domestic demand, higher employment, declining exports, and cautious business confidence.

In June, U.S. economic activity continued to expand, though with signs of easing momentum as overall growth slowed to its lowest level in two months. Manufacturing maintained steady growth at a PMI of 52.0, with output rising for the first time since February and employment reaching a 12-month high, while the services sector saw a modest slowdown to 53.1 amid weaker export demand and persistent inflationary pressures. Tariffs significantly contributed to sharp increases in input and selling prices across both sectors, driving goods prices to a three-year high and sustaining strong inflationary pressures overall. Companies faced growing workloads and backlogs at the fastest pace in over three years, leading to the strongest hiring surge in a year as firms sought to meet rising domestic demand. Inventory accumulation in manufacturing remained robust, partly fuelled by tariff-related concerns and ongoing supply chain adjustments. Despite the positive domestic trends, export orders declined—especially in services, which experienced the largest quarterly contraction since late 2022—dampening overall growth prospects. Business confidence softened slightly, particularly in the service sector, due to heightened uncertainty around government policies and trade tensions, whereas manufacturers showed a slight improvement in sentiment, anticipating potential benefits from trade protectionism. Overall, the data reflect a resilient yet cautious economy grappling with rising costs, slowing export demand, and uneven sectoral growth, reinforcing expectations that the Federal Reserve is likely to maintain a steady policy stance to carefully monitor inflation dynamics and economic resilience in the months ahead.

We expect U.S. economic growth to moderate further as tariffs and inflation persist, despite strong domestic demand and employment, with export declines and cautious business confidence continuing.

Consumer Sentiment

Consumer sentiment rose 16% in June but remains below December levels, with inflation concerns easing slightly and tariffs still a key worry.

Consumer sentiment rose sharply by 16% in June—the first increase in six months—confirming mid-month estimates, though it remains significantly below the post-election surge observed in December 2024. The improvement was broad-based, with expectations for personal finances and business conditions both increasing by approximately 20% or more. Despite this notable rebound, sentiment still lags roughly 18% behind its December peak and continues to reflect widespread concerns about an economic slowdown and potential inflationary pressures. While consumers remain uneasy about the possible effects of tariffs, they are not currently associating economic conditions with developments in the Middle East. Inflation expectations have moderated: the year-ahead rate dropped from 6.6% in May to 5.0% in June, and long-run expectations declined for a second consecutive month—from 4.2% to 4.0%—reaching their lowest levels in several months. Although concern over the inflationary impact of tariffs eased somewhat, expectations remain elevated compared to the second half of 2024, indicating persistent uncertainty about inflation risks.

We expect consumer sentiment to remain cautious despite June’s rebound, as inflation concerns, tariff impacts, and ongoing geopolitical conflicts continue to weigh on outlooks.