Big Week for Data, But Will It Move Markets?

This week is stacked with key economic releases. Kicking things off is June’s first Leading Economic Indicator: The Empire Fed Index (out today), which is followed by the Philly Fed on Friday. We’ll also see the NAHB housing market update Tuesday, along with May’s Housing Starts and Building Permits.

Don’t expect big moves based on housing data until longer-term rates drop meaningfully.

All eyes are on the FOMC statement Wednesday. While money supply has picked up since last year’s rate cuts, a sign the Fed’s plumbing is working, it’s unclear if the cuts are impacting the real economy. Yes, the yield curve has steepened, but indicators like housing sentiment (see chart) are still scraping the bottom.

The Macro Week In Review

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The Macro Week Ahead

🛢️ Another Macro Destabilizer

In markets on Thursday the conflict in the Middle East resulted in Risk-Off behavior with oil prices spiking, the dollar and gold rallying, and equity trading lower (as of Friday). One notable exception from the “flight to safety” trade was the U.S. 10-year bond yield. 

Yields did not catch their expected bid amid rising economic uncertainty. This speaks to broader concerns about the changing structural backdrop of U.S. financial markets. Above-trend inflation, unsustainable debt/deficit spending, and new trade barriers are making U.S. debt markets a less hospitable destination for foreign capital than it once was. 

Speaking to the cyclical macro backdrop, the escalation in Middle East conflict poses a direct inflation risk as rising oil prices act as a tax increase on consumers at the gas pump. 

The Strait of Hormuz handles roughly 26% of the world’s oil trade. Given eroding forward earnings expectations on the back of falling corporate profitability from tariffs, this geopolitical escalation is yet another risk factor for equity markets heading into summer. 

💪 U.S. Macro Data Firming in May/June?

The data on business and consumer sentiment for the month of April fell sharply following the implementation of broad-based tariffs on U.S. trading partners. 

Liberation Day marked the peak in the estimated effective tariff rate at ~26%, compared to ~13% today following negotiations, exemptions, and pauses on reciprocal tariff rates. The announcement of a trade deal and de-escalation between the U.S. and China is a positive step. Treasury Secretary Scott Bessent indicated that the 90-day pause could be extended for nations that have negotiated in good faith. 

This development is important as indicators that were pointing to an economic hard landing in April have stabilized in May and June. For example, the University of Michigan’s Consumer Expectations survey was at a 20-year low in April (47.3) before jumping to 58.4 for June. The NFIB’s Small Business Optimism Index also bounced 3 points from April to May. While many of these sentiment series hold a leading relationship with hard economic data over the course of a cycle, they can also reflect volatile trends in the equity market in the short run. This is why we pay particularly close attention to hard economic data such as retail spending and industrial production.

For a refresher on hard data vs soft data we made a video you can watch here.

One high-frequency proxy of U.S. consumer behavior is the Johnson Redbook Retail Sales Index, which increased 4.7% year-over-year for the week ending 6/6. While healthy, this marks a step down from the 5-7% run rate since January. There could be tariff-front running embedded in these figures, so we don’t want to draw conclusions from just one week’s worth of data. 

We can also look at labor markets for more hard data series. This is one area of the U.S. economy that, while broadly healthy, has surprised to the downside since May. Initial Jobless Claims (13-week moving average at 230k) have steadily increased since January to a level consistent with where the unemployment rate began increasing in 2024. However, this is not exactly an apples-to-apples comparison given new immigration policies and the number of people not in the labor force approaching the peaks of COVID-19.

Financial markets tend to emphasize data releases on nonfarm payrolls (139k vs. 126k consensus) and the unemployment rate (4.2% vs. 4.2% consensus). These two data points for May were good enough to sustain the market’s momentum and reinforce the Fed’s current stance on policy … which brings us to the week ahead.

📅 The Week Ahead

Above we covered many of the important data releases out this week for May and June such as Empire Manufacturing (June), Retail Sales (May), and the NAHB Housing Index (June). The market will be more focused on the Fed’s interest rate decision on Wednesday. 

Context is critical for analyzing policy behavior and consensus expects no action from the Fed this week with just 3% odds of a cut priced into financial markets. By the December 10th meeting, the market has priced in ~50 bps worth of cuts compared to ~100 bps in late April.

Despite this hawkish shift, Bloomberg’s Fedspeak Index, which gauges the hawkish vs. dovish public statements made by Fed governors, has pivoted dramatically dovish since 2024. The inference is that the Fed believes policy is having an impact, pointing to Core CPI falling from its cyclical peak of 6.6% in 2022 to 2.8% in May. Unfortunately, this is rearview mirror analysis.

Fed Chairman Jay Powell will have a difficult task in Wednesday’s presser as he looks to strike the right tone without roiling recently volatile U.S. bond markets. The U.S. 10-year bond yield has risen (at times) more than 100 bps since the Fed began cutting rates last fall … even before President Trump was elected. One interpretation of this yield action is that bond investors do not believe the Fed has defeated inflation. Many of our leading indicators of inflation suggest this is indeed the case.

Up against a structurally tight U.S. labor market, tariffs place an incremental cost on importers which will be offset through higher consumer prices (inflation), lower profit margins (lower earnings), or some combination of the two. The more tariffs feed through to CPI/PPI, the tighter policy should theoretically be. Of course, the Fed could view tariff inflation as a one-time event and may not adapt policy for price increases.

We expect that a “higher for longer” inflation regime would exert significant pressure on U.S. bond yields that are already struggling to digest the U.S. running a 6-7% deficit at peak employment. But we’re not there just yet.

This week, we’re expecting the Chairman to cite disinflationary trends in CPI/PPI, low unemployment, muted but still positive growth expectations, and recovering consumer sentiment as indications that monetary policy is in the right place. Per tradition, this will be met with caveats that Core CPI has not yet achieved its targeted 2.0% and the Fed is closely monitoring data on tariffs and inflation, but there’s not enough evidence yet for a policy shift.

Monetary policy typically does not respond to only a couple months of countertrend data, so we may have to wait until autumn until changes to the policy rate are being discussed.

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What We Read This Weekend

🛠️ Can Germany Reinvent Its Economy?

🏧 What A ‘Shadow Chair’ Would Mean For The Stock Market

🛍️ Trump Jawbones Retailers To Eat Tariff Costs