🦔 Welcome back to another week of market analysis! This week brought us some fascinating contradictions that I think tell a bigger story about where we're headed. The NY Fed's Empire State Manufacturing Survey showed current weakness but surprising optimism about the future, while car prices hit new records that highlight persistent inflation challenges. Meanwhile, the economic fundamentals continue showing resilience despite all the uncertainty swirling around trade policy and geopolitics.

I want to walk you through what these mixed signals mean for your investments and why I think we're at an inflection point where the next few months could set the tone for the rest of 2025.

The Empire State Manufacturing Survey that dropped this week perfectly captures the economic moment we're living through. Current conditions are getting hammered, but manufacturers are more optimistic about the future than they've been since the pandemic recovery.

June Manufacturing Snapshot:

This data tells me companies are essentially in a holding pattern. They're not placing orders or making investments right now because they don't know what tariff rates they'll face or what the final trade deals will look like. But that massive 23-point jump in future expectations suggests there's serious pent-up demand waiting to be unleashed.

The price dynamics are particularly interesting. Input costs are falling fast, but companies are still raising their output prices to the second-highest level since early 2023. This means businesses are finally able to pass through costs they've been absorbing, which could keep inflation pressures elevated even as some commodity prices moderate.

Speaking of inflation pressures, the latest car pricing data really drives home why the Fed's job remains challenging. Average new car prices hit $48,700 in April, just $1,200 below the all-time high from November 2022.

This chart shows us something really important about how inflation works in the real world. Cars are a perfect example of what economists call "sticky prices." Once they go up, they rarely come back down. That $15,900 increase over the decade isn't just normal inflation. It's also supply chain disruptions, chip shortages, and manufacturers realizing people will pay more.

Transportation takes up about 15% of the average household budget. When car prices stay this high, it squeezes spending on everything else. A family that used to spend $300 per month on a car payment is now spending $500+ for the same vehicle. That extra $200 has to come from somewhere. Maybe they eat out less, skip vacations, or delay home improvements.

The Fed looks at this data and sees persistent inflation pressure that rate cuts won't fix. You can't lower interest rates and magically make cars cheaper. The underlying supply constraints and market concentration in auto manufacturing mean these prices are likely here to stay.

This is why I keep telling people we might be stuck with higher inflation than the 2% target for longer than anyone wants to admit. Some price increases just don't reverse, and cars are exhibit A.

Despite all the uncertainty around trade policy and geopolitics, the core economic data continues to impress me. Three key areas stand out as particularly resilient.

Economic growth has remained above trend despite the headwinds. While Q1 GDP was soft due to inventory buildups, we're tracking toward 3%+ growth in Q2. Consumer spending is forecast at around 1.7% annually, which is solid given all the uncertainty.

What's remarkable is that actual consumption keeps holding steady even while consumer sentiment surveys show pessimism. This disconnect tells me people are spending based on their actual financial situation rather than their feelings about the economy. With inflation contained and jobs plentiful, consumers have the means to keep spending.

The unemployment rate has held at 4.2% for three consecutive months, well below the long-term average of 5.5%. We're seeing what I'd characterize as "low hiring, low firing" where companies are holding onto talent but being cautious about expansion.

Wage growth of 3.9% continues outpacing inflation, giving consumers positive real wage gains. This is crucial because people feel most comfortable spending when they're secure in their jobs and seeing their purchasing power increase.

Both CPI and PPI inflation surprised to the downside in May. Headline CPI came in at 2.4% and PPI at 2.6%, both well below their 2022 peaks when CPI topped 9% and PPI exceeded 18%.

The fact that tariffs haven't significantly impacted goods prices yet suggests companies have successfully built inventories ahead of potential trade disruptions. This inventory buffer should help contain price pressures even as we move through the rest of 2025.

Stock markets have shown impressive resilience, rebounding over 20% from the April lows. The S&P 500 has recovered from nearly a 20% decline and turned positive for the year.

This recovery reflects both solid economic fundamentals and the administration walking back some of the more extreme tariff proposals. Markets are forward-looking, and investors seem to be pricing in a scenario where trade disruptions are manageable rather than catastrophic.

However, I expect continued volatility as we digest key developments around trade negotiations, the potential tax bill, and ongoing geopolitical tensions.

The trade situation is evolving rapidly with several key developments:

China Framework Agreement: The U.S. and China have established a trading framework that would bring Chinese tariffs down from 145% to 55% (combining 10% reciprocal tariffs, 20% fentanyl-related tariffs, and 25% existing tariffs). China has agreed to restore rare-earth mineral licenses for six months while the U.S. relaxes restrictions on Chinese jet engines.

July 9 Deadline Approaching: The 90-day pause on tariffs for other major trading partners ends July 9. Treasury Secretary Bessent indicated this could be extended for partners showing "good faith" in negotiations, but tariffs will likely remain elevated at 10%+ levels.

The bottom line is we're moving from the 2% tariff environment at the start of the year to something substantially higher, but probably avoiding the worst-case scenarios outlined in April.

Last week's Israel-Iran tensions sparked the typical risk-off response with oil prices jumping 5-7%. Historically, geopolitical shocks tend to have short-lived market impacts, but they can create volatility and affect commodity prices.

The U.S. economy's relative insulation from global trade and energy dependence helps limit the domestic impact, but balanced portfolios tend to perform better during these periods as energy sector gains can offset broader market weakness.

The Fed remains in wait-and-see mode but has room to cut rates if economic conditions soften. With the fed funds rate at 4.25-4.5% and inflation around 2.5-3.5%, there's space for modest easing.

Futures markets are pricing in two rate cuts in the second half of 2025, which seems reasonable if the economy shows signs of slowing or if trade uncertainty weighs on growth.

The potential tax bill working through Congress could provide some stimulus, particularly through accelerated capital expenditure deductions and deregulation measures that might boost corporate spending in 2026.

Given this environment, I think several investment themes make sense:

Large-cap stocks offer stability and international exposure, while mid-caps could benefit from domestic economic strength. I'm particularly interested in financials, which should benefit from higher rates and potential deregulation, and healthcare, which offers defensive characteristics with growth potential.

Companies with strong balance sheets, consistent earnings growth, and competitive advantages are better positioned to navigate trade uncertainty and capitalize on opportunities when clarity emerges.

The technology companies reporting strong earnings exemplify this quality focus. They have dominant market positions, strong cash flows, and are investing heavily in future growth through AI and other innovations.

The 7-10 year Treasury space looks attractive with yields around 4.4%. This maturity range offers a good balance of yield and duration risk, particularly if the Fed does cut rates later this year.

Remember that the U.S. is 72% services and only 28% goods. While tariffs will impact goods pricing and demand, the broader service-led economy may be less affected than many fear.

The contradictions we're seeing in the data actually make sense when you step back and look at the bigger picture. Companies are being cautious about current spending because they don't know what the operating environment will look like, but they're optimistic about the future because they believe clarity is coming.

This creates an interesting setup for the second half of 2025. If trade negotiations progress and we get more certainty around policy, that pent-up business demand could be released relatively quickly. Combined with potential Fed rate cuts and tax legislation, we could see economic growth reaccelerate in 2026.

For investors, this environment rewards patience and quality. Volatility will continue as markets digest news flow, but the underlying economic fundamentals remain solid. Companies are adapting to higher costs and uncertain trade policies while maintaining profitability and preparing for future growth.

The key is maintaining diversification and focusing on businesses that can thrive regardless of the specific policy outcomes. Whether tariffs end up at 10% or 20%, whether the Fed cuts rates once or twice, quality companies with strong competitive positions will find ways to grow and create value for shareholders.

Source: FactSet, Edward Jones. Bonds represented by the iShares Core U.S. Aggregate Bond ETF.

This week brings retail sales data and the Fed meeting, both of which could provide important insights into consumer spending patterns and monetary policy direction.

The retail sales numbers will be particularly interesting given the mixed signals we're seeing between consumer sentiment and actual spending behavior. Strong retail sales would support the thesis that consumers are spending based on their financial capacity rather than their feelings about the economy.

The Fed meeting should provide more clarity on their thinking about the balance between trade policy uncertainty and economic resilience. While no rate changes are expected, Powell's commentary on the economic outlook will be closely watched.

The mixed signals we're seeing across different economic indicators reflect the unique moment we're in. We have solid underlying economic fundamentals but significant policy uncertainty. We have companies that are pessimistic about the present but optimistic about the future. We have inflation that's moderating in some areas but remaining sticky in others.

These contradictions aren't necessarily bad for investors. They create opportunities for those willing to look beyond the headlines and focus on fundamental value. The companies and sectors that can navigate this uncertainty successfully will likely emerge stronger when clarity returns.

The manufacturing data showing current weakness but future optimism perfectly captures this dynamic. Businesses are essentially coiled springs waiting for the uncertainty to resolve so they can release pent-up investment and hiring plans.

For long-term investors, this environment reinforces the importance of staying diversified, focusing on quality, and maintaining perspective. Short-term volatility is the price we pay for long-term returns, and the current setup suggests that patience could be well rewarded as we move through the rest of 2025 and into 2026.

The wisest hedgehogs remember that uncertainty creates opportunity for those prepared to act when others are paralyzed by indecision. Stay informed, stay diversified, and stay focused on the long term.

Thanks for reading, and I'll see you next week with another market update!

Hedgie

^{DISCLAIMER: For educational purposes only. I'm a hedgehog who types with tiny paws, not a licensed financial advisor (my only certifications are in "Burrow Construction" and "Quill Maintenance"). Investments involve risk, sometimes as prickly as my back. Do your own research or consult with a human financial professional, as taking investment advice from woodland creatures, no matter how financially literate, is generally not recommended by the SEC.}