Market Momentum Despite Economic Uncertainty

Economy Watch

The big economic news this week was the June inflation data, which revealed an unexpected pattern. Consumer prices accelerated modestly, while producer prices held steady—breaking from the typical sequence where producer price increases precede consumer inflation.

This divergence suggests that businesses and foreign suppliers are absorbing much of the tariff costs rather than passing them fully to consumers. Treasury data shows meaningful increases in tariff revenue, confirming these taxes are being paid, yet the costs aren't showing up entirely in producer or consumer prices.

The pattern aligns with how these measures function. The Consumer Price Index includes imports and directly captures tariff effects, while the Producer Price Index excludes imports and focuses on domestic production, making it less sensitive to trade policy changes.

Multiple factors drove June's results. Consumer prices rose due to partial tariff pass-through, higher food and energy costs, and shelter expenses. Producer prices stayed flat as declines in the service sector offset pressures in manufacturing.

The timing coincides with expanded tariff measures since January, including next month's copper tariff. Copper's broad economic footprint means price changes could affect multiple sectors, from electrical systems to electric vehicles.

Overall, the data points to tariff costs being distributed across foreign suppliers, domestic businesses, and consumers. The bigger economic risk may lie in how uncertainty around import costs could slow business investment and global trade activity.

Current economic indicators present a mixed picture. The labor market remains stable, with employment levels holding steady. However, retail sales data shows that consumer spending continues but with a notable shift toward credit-based purchases. This trend suggests consumers are maintaining spending patterns despite potential strain on household budgets.

Economic growth projections for the first half of 2025 have weakened steadily throughout the quarter. The Atlanta Fed’s GDPNow tracking model currently estimates first-half GDP growth below 1%, a substantial downward revision from earlier projections that anticipated stronger economic momentum (Federal Reserve Bank of Atlanta 2025). Inflation reached its lowest point in April 2025 and has since trended higher. The Cleveland Fed’s inflation expectations indicate this upward trajectory will continue, and recent tariff announcements are likely to add further inflationary pressure to the economy (Federal Reserve Bank of Cleveland 2025).

Corporate earnings estimates have stabilized, but market valuations remain elevated. Despite high stock prices, investors appear unconcerned, driven by optimism about capital spending on artificial intelligence and its potential productivity gains.

This week, expectations for Federal Reserve rate cuts increased. According to the CME FedWatch Tool, market participants are pricing in a 2% cut in the federal funds rate over the next 18 months (CME Group 2025). Typically, this would signal that markets are bracing for a weakening economy, prompting significant Fed intervention. However, it could also reflect anticipation of a new Federal Reserve Chair in 2026, potentially leading to a more accommodative monetary policy.

By The Numbers

Employment Indicators

Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.

Note: Values above 250K for the 4-Week Average, combined with rising unemployment, could signal a weakening economy.
Next unemployment report: August 1, 2025. Source: Department of Labor

Economic Growth (Real GDP)

GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Estimate from Federal Reserve Bank of Atlanta

Inflation Measures (CPI Year-over-Year)

Source: Bureau of Labor Statistics; May estimate from Federal Reserve Bank of Cleveland

Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.

Interest Rate Outlook

Current Fed Funds Rate: 4.25-4.50%

Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool

Corporate Earnings Outlook (S&P 500 Estimates for 2025)

Source: S&P Dow Jones Indices

Market Valuation

Note: Equity valuations remain expensive by historical standards

Disclosure:

This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.

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