Weekly Update 05/23/2025: Yields Rise on Moody’s Downgrade as Employment Remains Healthy

Alphabet shares rise as more AI tools are incorporated into search
RTX Raytheon unit provides new radar system to the U.S. Missile Defense Agency
AT&T agreed to buy the consumer fiber operations of Lumen Technologies Inc.

Domestic Economic News

Applications for US unemployment benefits fell to a four-week low, adding to evidence that the job market remains healthy in the face of growing uncertainty tied to trade policy. Initial claims decreased by 2,000 to 227,000 in the week ended May 17, roughly in line with forecasts, Labor Department data showed Thursday. The period includes the government’s survey week for its monthly employment report. Continuing claims, a proxy for the number of people receiving benefits, rose to 1.9 million in the previous week. The level of jobless claims indicates companies are relatively comfortable with staffing levels despite elevated anxiety about tariffs and the ripple effects from the Trump administration’s actions to shrink the federal government. While the administration backpedaled on some tariffs, Federal Reserve Bank of St. Louis President Alberto Musalem still sees trade policy likely weighing on the labor market. “On balance, tariffs are likely to dampen economic activity and lead to some further softening of the labor market,” Musalem said in a speech Tuesday. Multiple large companies have recently said they’re cutting jobs, including Nike Inc. and Amazon.com Inc. Schools and businesses that have lost funding from the federal government have also announced a number of layoffs, including Columbia University. The four-week moving average of new applications for jobless benefits, a metric that helps smooth out volatility, rose to 231,500 — the highest since October. Before adjusting for seasonal factors, initial claims also fell last week, led by Michigan and Virginia.

Long-dated Treasuries fell on Monday as investor attention turned to the US’ ballooning debt after Moody’s Ratings stripped the nation of its last top credit rating. The 30-year yield rose as much as nine basis points to 5.03%, the highest since November 2023. The benchmark 10-year rate climbed seven basis points to 4.55%. The dollar fell against all of its Group-of-10 peers, with the euro surging over 1% to $1.1288. Moody’s announced Friday it was downgrading the US to Aa1 from Aaa, reinforcing Wall Street’s growing worries over the nation’s fiscal outlook as Capitol Hill debates even more unfunded tax cuts. The company, which trailed rivals, blamed successive presidents and congressional lawmakers for a ballooning budget deficit it said showed little sign of narrowing. Angst around government spending is likely to remain a focus for investors around the world, with fiscal strains evident in nations from Japan to the UK. Japanese Prime Minister Shigeru Ishiba said the country’s financial conditions are worse than Greece’s on Monday, and even historically austere Germany is set to dramatically ramp up spending. That all weighed on long-dated government bonds globally. The yield on 30-year German notes rose as much as seven basis points to 3.11%, while equivalent rates on Italian, French and UK debt also posted increases. Moody’s was the last of the three main rating firms to remove the US top-tier rating. S&P Global Ratings was the first to move in 2011, while Fitch Ratings followed in 2023 — both have the nation at AA+. The latest downgrade was anticipated by many given it came when the US federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product. The government is also on track to surpass record debt levels set after World War II, reaching 107% of GDP by 2029, the Congressional Budget Office warned in January.

US sales of previously owned homes unexpectedly dropped in April to the slowest pace in seven months, restrained by ongoing affordability constraints and highlighting a lackluster start to the key spring selling season. Contract closings decreased 0.5% to an annualized rate of 4 million, according to National Association of Realtors data released Thursday. That fell short of the median estimate in a Bloomberg survey of economists and marked the weakest April since 2009. “Pent-up housing demand continues to grow, though not realized,” NAR Chief Economist Lawrence Yun said in a statement. “Any meaningful decline in mortgage rates will help release this demand.” Odds of a sustained pickup in the resale market are limited as mortgage rates march higher and prices stay elevated, despite more listings coming on the market. What’s more, consumer sentiment is near the lowest level on record, and the share who say now is a good time to buy a home is also close to an all-time low, according to the University of Michigan. Mortgage rates rebounded last week to a three-month high of 6.92%, and are continuing to move up even more as Treasury yields climb. The two tend to move in tandem, and Treasuries have sold off recently over concerns about the US’s swelling debt and deficits. One disappointing aspect of the report was that a welcome increase in home listings failed to spark homebuying — which Yun said on a call with reporters will result in a “slight downgrade” to his yearly sales forecast. The inventory of existing homes for sale increased nearly 21% from a year ago to 1.45 million, the most for any April since 2020, NAR data show. Greater supply is also failing to bring prices down. The median sales price climbed 1.8% from a year ago to $414,000, a record for the month of April and reflecting greater activity at the upper end. However, Yun noted the size of the increase was the smallest since mid-2023, pointing to slowing price appreciation. Existing-home sales account for the majority of the US total and are calculated when a contract closes.

On a more positive note, US April new home sales rose to 743,000, which was the highest since February, 2022 according to the Census Bureau. Sales rose 10.9% to a 743,000 annualized rate on a surge in the South and the Midwest. The forecast range according to Bloomberg ranged from 650,000-749,000 with the median estimate at 695,000. New home sales rose 73,000 in April from the prior month.

Traders got a wake-up call early Friday morning as President Donald Trump threatened a sweeping 50% tariff on the European Union and a 25% levy on Apple Inc. if the tech giant failed to move iPhone manufacturing to the US. Trump said Friday in a social media post that the higher charge on the EU would start on June 1 because “our discussions with them are going nowhere,” adding that he saw the bloc as “very difficult to deal with.” Separately, Trump posted that he already told Apple the company’s popular smartphones should be made in the US and that he was nonplussed by its effort to partially move production from China to India. Bessent helped relieve some tension by highlighting the fact that negotiations with other countries such as India and Japan were going very well and some countries in Europe like Germany (the main economic power there) were interested in making a deal but that the bloc itself was proving challenging to deal with. As always, we will keep you up-to-date on the ongoing trade deliberations and in the meantime – stay tuned!

Interest Rate Insight and the Fed

This was a great deal of “Fed Speak” this week and here are some highlights:

Federal Reserve Vice Chair Philip Jefferson indicated this week central banks should stand ready to provide liquidity to the financial system, but warned against practices that encourage excessive risk. “It is vital for a central bank to make clear that it stands ready to provide liquidity should stress emerge,” Jefferson said in remarks prepared for the Atlanta Fed’s 2025 Financial Markets Conference in Fernandina Beach, Florida. “But a central bank must also take steps to minimize moral hazard. Moral hazard’ in this context refers to the concern that publicly provided liquidity might encourage private financial institutions to take on excessive risk,” he said. “At their core, liquidity facilities support the smooth operation and stability of the banking system, the effective implementation of monetary policy, and the furtherance of a safe and efficient payment system,” Jefferson went on to add.

Federal Reserve Bank of Atlanta President Raphael Bostic emphasized his worries over inflation as he repeated his expectation for one interest-rate cut this year. “Given the trajectory of our two mandates, our two charges, I worry a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way,” Bostic said Monday during an interview with CNBC, referring to consumer expectations for the future rate of price increases. Bostic said he wants to see the elevated levels of uncertainty, driven by tariffs and other Trump administration policies, abate before he backs any interest-rate changes — a process that could take three to six months. “Today, things are very much in flux, there’s a lot of uncertainty,” Bostic said. “And what it means for me is before I want our policy to move in any dramatic direction we’ve got to let things sort out.” He added, “I’m leaning much more into one cut this year because I think it will take time.” Fed officials left their benchmark rate unchanged earlier this month and said there are greater risks of both higher unemployment and inflation. Fed Chair Jerome Powell emphasized the US central bank is not in a rush to lower rates.

Federal Reserve Bank of New York President John Williams said policymakers may need months to get a better understanding of the outlook for the economy. “It’s not going to be that in June we’re going to understand what’s happening here, or in July,” Williams said Monday at a conference organized by the Mortgage Bankers Association. “It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.” Williams continued to stress that uncertainty was hindering not only policymakers, but also firms and households as they struggle to predict how tariffs and other policies from the Trump administration will reshape the US economy. Fed officials held interest rates steady in early May, expressing heightened uncertainty largely due to tariffs. Many policymakers see risks of both higher unemployment and inflation also stemming from the Trump administration’s trade policy. They’ll next meet June 17-18 in Washington. Williams, like many of his colleagues, said the Fed can take its time in assessing new data. While he acknowledged inflation has been coming down and the economy is close to full employment, he’s monitoring delinquencies and the appetite for consumer spending. He also described the Fed’s current policy setting as “slightly restrictive” and in a good place. The Trump administration recently reached a temporary agreement with China to lower tariffs on many imported goods. Negotiations are ongoing with key trade partners halfway through a 90-day pause on reciprocal levies.

Federal Reserve Governor Christopher Waller said the central bank could cut interest rates in the second half of 2025 if the Trump administration’s tariffs on US trading partners settle around 10%. “If we can get the tariffs down closer to 10% and then that’s all sealed, done and delivered somewhere by July, then we’re in good shape for the second half of the year,” Waller said Thursday during an appearance on Fox Business. “Then we’re in a good position at the Fed to kind of move with rate cuts through the second half of the year,” he added. Fed officials have held the central bank’s benchmark interest rate steady this year, citing an overall solid economy and uncertainty surrounding President Donald Trump’s tariff policies. Trump has implemented a baseline 10% tariff on dozens of US trading partners, and has temporarily paused plans for higher levels of duties. He has also hit many Chinese imports with a 30% tariff, after previously setting levies on China in excess of 100%. Economists broadly expect Trump’s trade policies to drag down economic growth and put upward pressure on inflation even with the temporary reduction in tariffs against China. Waller reiterated he expects any increase in inflation related to tariffs to be temporary. Waller said if the administration reverts back to higher levels of tariffs, it would “have much bigger impacts on inflation and put more of a handcuff on us to do anything with short-term rates.” Waller spoke shortly after Trump’s signature tax bill narrowly passed the House. The bill, which heads next to the Senate, would extend Trump’s first-term tax cuts, increase the US debt ceiling and add to the nation’s deficit. Amid growing concerns over the US fiscal outlook, longer-dated Treasuries on Wednesday extended a selloff after an auction for 20-year bonds was greeted with weak demand. The yield on the 30-year bond rose above 5%, to its highest since 2023. Asked about what’s driving the selloff in Treasuries, Waller said he’s heard from players in financial markets about the Republicans’ tax bill. “They thought it was going to be much more in terms of fiscal restraint, and they’re not necessarily seeing it,” Waller said.

Impactful International News

Euro-area inflation will fall below the European Central Bank’s target next year because of fallout from US trade policies, according to the European Commission. Consumer-price growth will slow to the 2% goal by the middle of this year and average only 1.7% in 2026, the EU’s executive arm said in its spring forecast released on Monday. Downward pressures including lower energy costs, the diversion of Chinese goods and a stronger euro are having a “clearly negative” impact, the commission said. Economic expansion is seen picking up to 1.4% next year from 0.9% in 2025, a slightly more optimistic view compared to the last ECB forecast in March and the International Monetary Fund’s global outlook in April. Brussels officials see uncertainty weighing on domestic demand, but labor markets staying robust. “Inflation is declining faster than previously forecast and is on track to reach the 2% target this year,” European Economy Commissioner Valdis Dombrovskis said. “But we cannot be complacent. The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness.” The ECB will present its own set of quarterly forecasts alongside its next rate decision on June 5. Investors are expecting another reduction in borrowing costs, with many policymakers sharing the view that US tariffs will put downward pressure on prices.

Uncertainty about how policies evolve is high. Most euro-zone exports to America are subject to a 10% tariff during a 90-day negotiation period. The EU is seeking to secure favorable terms in these talks, but it has also prepared a list of products to hit with counter-levies should discussions fail. The EU’s forecasts assume that US tariffs remain at 10%, with higher duties on some products and exemptions on others, and used a cut-off date of April 30 for other inputs. Some de-escalation between the US and China was expected, but with duties remaining at a higher level than what was announced on May 12. The two nations agreed to temporarily slash tariffs to allow for talks after previously raising them to prohibitive levels. The tensions have raised the threat that a large amount of Chinese products get rerouted to the euro zone, intensifying competition and driving down prices. “Given the magnitude of these flows, this is set to markedly increase competitive pressures in consumer goods markets across the EU,” the commission said. Together with the appreciation of the euro, this should push goods inflation down to close to 0% in the euro area, it said.

Private-sector activity in the euro area unexpectedly shrank in May as services recorded their worst performance in 16 months. The Composite Purchasing Managers’ Index by S&P Global fell to 49.5 from 50.4 in April, dipping below the 50 threshold separating expansion from contraction, data Thursday showed. Analysts had predicted a slight increase to 50.6. “The euro-zone economy just cannot seem to find its footing,” Cyrus de la Rubia, an economist at Hamburg Commercial Bank, said in a statement. “While foreign demand for services is softening, it is the sluggish domestic demand that seems to be dragging the sector down.” The euro area’s 20-nation economy held up well in the early months of the year, outpacing expectations despite trade uncertainty weighing on corporate investment and household spending. Growth is likely to be restrained in 2025, however, with the European Commission this week forecasting an advance of 0.9% in gross domestic product. Momentum is largely coming from beyond the region’s two biggest economies, with Germany’s PMI reading also wrong-footing analysts by plunging below 50 on a similar pullback in services. France’s, meanwhile, held beneath that threshold for a ninth month. A longstanding manufacturing malaise is partly to blame, though a push by Germany’s new government to overhaul ageing infrastructure and rebuild the military should provide support in the years ahead. In the region’s biggest economy, such hopes appear to be bearing fruit, with a separate reading from the Ifo institute — also published Thursday — showing a stronger-than-anticipated increase in expectations. May saw euro-zone manufacturers perform better than services for the first time since the pandemic. De la Rubia suggested attempts to beat US trade levies may be the reason for the factory strength, and that lower oil prices could help sustain it. “Efforts to get ahead of those tariffs might partly explain why manufacturing has held up a bit better lately,” he said. “Manufacturers have now increased production for the third straight month, and for the first time since April 2022, new orders did not decline.” Other countries, particularly those like Spain in the continent’s south, are faring better. Ryanair Holdings Plc said this week that it’s seeing robust travel demand this summer, buoyed by a “reluctance to go transatlantic.”

Company Events

SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.

Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc. [“SGK”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from SGK. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SGK is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the SGK’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.sgkwealthadvisors.com. Please Note: SGK does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to SGK’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a SGK client, please contact SGK, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.