Market Thoughts: A human hamster wheel

Investors, not to mention U.S. trading partners, continue to find themselves on the equivalent of what I will charitably call a human hamster wheel. Round and round we go, when we stop, no one knows. It’s been an emotionally charged brain-spinning few months. And so it goes.

Earnings season is off to a strong start, financials weighing in with robust profits and positive outlook. As a cherry on the cake, buybacks and dividend payouts are on the rise. Financials are expensive relative to their history. Like big tech, they command a valuation premium based on their strength. We remain overweight both sectors globally.

Government bond markets captured attention again this week, especially at the longer end of the curve. Interest rates continue to press higher for a variety of reasons. Fed Chair bashing seems to be the summer fashion. The fact that it continues on and off suggests a broad attempt to socialize Powell’s sacking. The more you hear it, the more it appears inevitable.

Bond vigilantes want nothing to do with government interference with independent monetary policy. The political pretense of appointing a shadow Fed Chair is that Jay Powell’s voice gets diminished. Were a named replacement perceived politicized, expect a bond market riot. Insert any reference to Arthur Burns you’d like. If you’re unfamiliar with Burns’ backstory, it’s worth a Google.

The Fed’s independence is sacrosanct to the integrity of markets. The Fed’s policy rate is the risk free rate for all assets. It’s the foundational input to capital markets. If there is any perception of it being politically swayed, all markets will reprice accordingly. Turkey by way of example.

The Fed was late in addressing inflation. Transitory is a word that should be purged from policymaker jargon. Once recognized, the Fed leaned in to address their mistake. They admitted to it as well. That doesn’t make it better. It does show accountability, unlike much in Washington.

There was a brief moment where the Fed was ahead of inflation. I’m not as evangelical as those who say the Fed failed by not reaching 2%. I would readily take +2.5% inflation if it came with above trend growth. That’s where we were heading pre-tariff tantrums. The dream’s in the ditch, to borrow a line from the band Deer Tick. A great song, by the way.

Retail sales in June printed above expectations, bolstering a narrative of consumer resilience. Some of that bounce was driven by the dialing back of tariff scare headlines last month. That said, consumption growth has slowed. Import-driven goods lagged. Notable was a jump in food service sales.

June inflation came in OK. It confirmed price weakness across discretionary services. Last year companies forced “shrinkflation” on consumers to manage margins. This year consumers have responded in kind with “thriftflation.” With rising concern tariffs will squeeze wages, consumers are gradually pulling back spending. Aren’t you?

Tariffs were visible in the June inflation data. Core goods (excluding autos) rose the most since June 2022. You can clearly see an inflation bump in imported goods. Having sold off inventory ahead of tariffs, it looks like new vehicle prices may soon be on the rise again. They’ve remained stable to date.

Businesses have only modestly passed along tariffs to consumers. No one knows what they’re solving for. Companies ‘bought insurance’ front loading pre-tariff inventory builds to buffer. As those inventories get drawn down, they will be replaced at higher prices. Someone has to pay for it.

Inventory hoarding is a stay of execution. That said, it’s kept inflation in check. As one research note I read this week put it, June CPI was “a knock-out punch to the tariff inflation deniers.” It wasn’t a knock-out, but it was a punch that certainly got attention. Rope-a-dope redux.

There’s an interesting inflation narrative I thought worth highlighting. Multinationals may opt for sharing “tariff love” across global markets, rather than forcing it all on U.S. consumers and margins. That’s worth keeping in mind as earnings season and C-suite commentary amp up.

All of this leaves the Fed on hold in July. I believe a rate cut in September doesn’t round up to a coin toss currently. Data will drive the Fed’s decision. I’d add that heckling from politicians may push policymakers to err on the side of pre-emption. They can’t show a weak policy hand from bullying.

Keep an eye on the long end of the bond curve for quivers. Bond issuance and debt levels are on the rise. Confidence in the resilience of Fed independence is paramount to keeping bond vigilantes at bay. Politicians borrow to spend. They live to spend. Low rates let them spend more uncurbed, until markets bite back. Markets always bite back, eventually.

We’ve passed the ‘half-way home’ mark on the year. My Tunes for Our Times (so far) playlist has +100 songs on it. I thought I’d share what I’ve pulled aside so far. A lot will cycle on and off between now and year end. You can find me on Spotify under the user profile: tunes4ourtimes. Also, at tunes4ourtimes.com. Playlists can be found under the ‘tunes music links’ tab. Happy summer listening…

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 7/17/25.