Weekly Research Briefing: Summertime

The May jobs report delivered very few surprises. Nonfarm employment increased 139,000, a smidge firmer than expectations, though the prior two months estimates were revised down by 95,000 on net. The unemployment rate was unchanged at 4.2% in May for the third straight month... A few data points earlier this week raised concerns that the labor market could be slowing more abruptly. Instead, today’s data suggest that employment conditions are only very gradually cooling. For the Fed, today’s report was almost tailor-made to reinforce their bias to sit back for a long while and wait for employment and inflation developments to dictate where policy goes next. We continue to look for the next rate cut in December and believe that the mid-June FOMC meeting is likely to be a non-event.

@NickTimiraos: Prices paid rose to a 2½ year high in the ISM services purchasing managers index for May. New orders fell to a 2½ year low. From the survey: “Tariffs remain a challenge, as it is not clear what duties apply. The best plan is still to delay decisions to purchase where possible.”

"Higher tariffs have affected businesses in a number of different ways ... All in all, almost half of businesses reported a decrease in their bottom lines, though a small share saw a boost as some businesses have been protected by tariffs."

John Starr, the owner of UltraSource, an importer and manufacturer of meat-processing technology in Kansas City, Mo., said he is hunkering down—no hiring, no more capital spending—until he has clarity on tariffs.

The company is waiting for suppliers in Europe to finish work on $20 million in orders it placed before 10% tariffs took effect on April 9. That means he faces a $2 million levy if tariffs stay at that level.

“How am I supposed to pay this?” said Starr, a third-generation owner of the company. “That could wipe out profits for a year.”…

Starr, at UltraSource, orders equipment that has a lead time measured in months. Because those products are made to each customer’s specifications, Starr can’t resell them if clients refuse to eat the cost of the tariff.

“I have to take action now,” Starr said. “We’re going to be very careful about any cash expenditure just because we need that cash to pay the tariff.”

Starr, who said he has already racked up $300,000 in unanticipated expenses because of tariffs, said the prospect of business tax cuts is of little use if his profits are zeroed out from tariffs. He said he doesn’t object to paying a 20% tariff on prospective orders as long as he has certainty the duty won’t suddenly change after he has negotiated purchase orders with customers and vendors.

The RV and boat maker said ahead of the opening bell that a strong selling season in March was followed by growing economic uncertainty that worsened consumer sentiment and made its deal network more cautious in the months that followed.

The pressure was most acutely felt in the company’s motorhomes business, which is now expected to produce significantly lower revenue in the last two quarters of the fiscal year than previously anticipated, Chief Executive Michael Happe said.

Winnebago has initiated a series of strategic actions for the rest of the fiscal year to cut costs and improve profitability, including aggressively modifying its production schedule and adjusting headcount.

“We have recently taken significant steps to lower field inventory, improve working capital, align our production schedule to market demand, and accelerate stronger product value for our consumers in the future,” Happe said.

COST reported May SSS (ex-gas/FX) of +6.0%, below consensus (Consensus Metrix) at +6.2% and decelerating from +6.7% in April. US comps (ex-gas) came in at +5.5%, below consensus at +6.4% and decelerating from +7.1% in April.

The Trump administration’s new 50% duty on imported steel could increase store prices for items in steel cans by 9% to 15%, according to the Consumer Brands Association, a trade group whose members include Campbell’s, Hormel Foods and Del Monte Foods. At that rate, the price of a can of vegetables costing $2 could increase by 18 cents to 30 cents.

“The American consumer is going to pay more for their cans,” said Dan Dietrich, vice president for strategy at Trivium Packaging…

Can manufacturers estimate that about three-quarters of tin-plate consumed in the U.S. is foreign-made, with much of it coming from Europe and Canada. Nearly 1.5 million tons of tin-plate were imported last year, about 37% more than in 2015, according to U.S. Census Bureau data.

Tin-plate is made with steel derived from molten iron, but most steel in the U.S. is now made from melted scrap, and that doesn’t measure up to the can industry’s exacting quality standards. Pittsburgh-based U.S. Steel continues to produce tin-plate but has reduced its production volume in recent years…

“The biggest concern we have is that these canned vegetables start getting to a point where the consumers are not willing to purchase them any more,” Hunter said.

Cans are prized for enabling long shelf lives for vegetables, fruit and other ready-to-eat foods, able to keep for years without spoiling. But can manufacturers worry that higher can costs will discourage their use.

Americans can expect to pay more to stay cool this summer thanks to forecasts for above-average temperatures across the country and natural-gas prices that are heading into air-conditioning season 37% higher than last year.

On average, Americans should count on their electricity bills in June, July and August rising 4% from last year, mostly due to more expensive natural gas, according to the Energy Information Administration.

That would bring the nationwide summertime average to $186 a month, up from $180 last year and $148 four years ago, the EIA said.

New England—where a dearth of gas pipelines keeps energy prices among the highest in the country—should see the biggest jump in monthly bills, up 6.7% from last year, to about $200. The Pacific Coast is among the few places where lower bills are expected, down 1% from last summer, to an average of $176.‬‬

The stock market has become tariff-scare-proof now that the S&P 500 is only 2.3% below its February 19 record high despite Trump's Tariff Turmoil (TTT) since then. After Friday's better-than-expected employment report, the stock market has also become recession-scare-proof. According to Polymarkets, the odds of a recession were back down to 27% on Friday from a recent peak of 66% on May 1.

The Goldman Sachs IPO Issuance Barometer represents a gauge for market participants to monitor if the macro environment is conducive to new IPOs. It incorporates five indicators: (1) S&P 500 drawdown, as measured by how far the index trades from its trailing 52-week high, (2) CEO confidence, (3) Change in the nominal 2-year Treasury note yield, (4) S&P 500 EV/sales, and (5) ISM Manufacturing Index.

Companies with weaker credit ratings tapped the high-yield bond market for $32bn in May, the most since October, according to data from JPMorgan. Junk bond sales in the first week of June already have surpassed April’s $8.6bn total.

Bankers and investors say they expect a steady flow of new debt sales during the rest of the month and into July while demand remains high and market uncertainty stays relatively low.

But the expiration of the 90-day pause on Donald Trump’s so-called “liberation day” tariffs early next month could set up another surge in uncertainty, echoing the early April ructions that ground the market for new levered debt deals to a halt…

There is also strong demand for highly rated corporate credit. Bank of America strategists say they expect investment-grade bond sales to be between $110bn and $120bn in June, which would be the most for the calendar month since 2021.

Kyle Stegemeyer, head of investment grade debt capital markets and syndicate at US Bancorp, said he expected companies to continue to take advantage of lulls in volatility before potential surges due to tariffs and tax bill negotiations.

“I think most issuers are coming to the conclusion that if there’s an open window and the backdrop’s attractive, why wait it out until closer to maturity?”

While inflation in the Eurozone fell below the ECB’s medium-term 2 per cent target in May and is expected to fall to just 1.6 per cent next year, the Fed’s preferred inflation metric is expected to rise from its current level of 2.1 per cent to above 3 per cent by the end of the year.

“The trade shock now looks set to push inflation higher in the US and inflation lower in the Eurozone,” said Krishna Guha, at Evercore ISI.

For the Euro area, Lagarde signalled on Thursday that policymakers had “nearly concluded” their current rate cutting cycle. Markets are expecting the Frankfurt-based institution to make another quarter-point reduction in the second half of the year. Such a move could widen the gap in interest rates between the US and Europe to more than 250 basis points…

“From the perspective of the currency market, the Fed is keeping monetary policy tight for bad reasons, while the ECB is cutting for good reasons”, said Sam Lynton-Brown, global head of macro strategy at BNP Paribas.

US rate setters were holding rates at the current level, not because economic growth was “extraordinarily strong”, but because of “tariff-induced inflation”, Lynton-Brown said, while the ECB was cutting in response to “disinflationary pressure”, while growth was still “around trend” and “set to recover in 2026”.

@KevRGordon: Pretty big "catch-down" for 2025 GDP estimates when it comes to the U.S. vs. Eurozone

One example would be an international investor who maintains an account within the United States for the purpose of business. If this investor wishes to transfer funds to another account outside the country, it may bear the appearance of a remittance. But it is not one: the investor is withdrawing his or her own money, not transferring funds to others. An RTP may have difficulty verifying this, wrongfully charging someone withdrawing investment returns. In this case, the tax may function even as a de facto capital control, bearing the appearance of a capital outflow tax. This could disincentivize further and future foreign investment in the United States.

Another potential problem would be for businesses with international operations or supply chains. For instance, a small business in the Detroit-Windsor, Ontario area may have hundreds of transactions with Canadian and US customers, suppliers, and employees. Many of those business transactions will need to prove they are non-remittance in nature. And a larger business with thousands or tens of thousands of employees both in the US and elsewhere may do thousands of international transactions a day, most for reasons other than immigration or remittance. Creating a detailed accounting of these transactions, all to prove they do not incur tax, is a waste of everyone’s time.

@EricFinnigan: For the first time in the US, more babies are now born to moms 40–44 than 15–19.

This marks 2 historical shifts for the US, plummeting teen pregnancy and gradually rising fertility for older women.