Stocks Stage Comeback In May – Domestic Equity Overview

Profit margin contraction is a growing concern as numerous U.S. companies are absorbing the costs of tariffs to maintain market share and avoid customer discontent. Such a dynamic could potentially minimize inflationary pressures and lead to a reduction in interest rates by the Federal Reserve, as consumers are sensitive to paying higher prices caused by tariffs.

U.S. equities staged a recovery from lows reached in May due to optimism regarding easing tariff tensions. Earnings remain in focus as companies have started to report revenue and sales results since the implementation of tariffs in early April. Second-quarter earnings, which are scheduled to be released in July and August, will reveal how much tariffs have hindered business profitability. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg)

Rates Remain Stubborn In May – Bond Market Overview

Concerns over the Treasury bond market surpassed those of proposed tariffs in May, as the downgrade in U.S. debt by credit-rating agency Moody’s drove yields higher and Treasury prices dropped. A disappointing Treasury auction in May stoked fears about falling demand for U.S. debt, resulting in rising government bond yields.

Consumer loan rates haven’t experienced much reprieve, with hope that the Fed will eventually reduce rates to alleviate the current debt-related duress among consumers. The average 30-year fixed conforming mortgage rate stood at 6.89% at the end of May, below the 7% threshold that the housing market follows closely. (Sources: Treasury Dept., Moody’s, S&P, Fitch)

Shipping Container Volume Drops – Global Trade

Shipping container volume headed to the U.S. from China has dropped by roughly 50% since the announcement of the tariffs, posing a threat of shortages and elevated prices for American consumers. It takes about 30-50 days for goods and products to reach the U.S. West Coast from China via ocean cargo transport. The drop in volume is the result of importers anticipating higher tariff costs on imports into the U.S.

A drop in trans-Pacific shipments eventually leads to a drop in inventory of goods, which may lead to higher prices for businesses and consumers. The most recent 90-day postponement in implementing new tariffs may temporarily increase container shipments as importers race to avoid any new tariffs. The full impact of tariffs hasn’t yet hit retailers, in part because many companies stockpiled inventories ahead of tariffs and postponed shipments from China. So far, the economic impact of tariffs has been muted in the U.S., with unemployment and inflation generally holding steady.

Sources: Commerce Dept., The Port of Los Angeles

The Penny No Longer Makes Sense – Currency Overview

The Treasury Department announced this past month that it would cease producing pennies in 2026. After 233 years of minting pennies, the one-cent coin will no longer be produced and will eventually fade out of the money supply and circulation. The penny, though worth only a cent, costs nearly 4 cents to make. Congress sets the rules for currency production, including the size and composition of coins, and can discontinue or eliminate coins. But the Treasury has the power to halt the production of new coins.  With production costs rising, the U.S. government lost more than $85 million last year on the roughly three billion pennies it produced.

As pennies eventually vanish from circulation, there will not be enough pennies to use in everyday cash transactions, so businesses will be required to round up or down to the nearest 5 cents. The rise in copper prices over the past several decades led to a drastic material change to the penny in 1982, when the composition of materials was altered to 97.5% zinc and only 2.5% copper. Before 1982, copper made up more than 95% of a penny. During World War II, pennies were made from steel in 1943 to conserve copper for war efforts.

Sources: The Treasury Department, U.S. Mint

What A Credit Downgrade For U.S. Debt Means – Fiscal Policy Initiatives

The U.S. government, similar to consumers across the country, is subject to an ongoing monitoring of current financial circumstances. Credit scores determine the financial ability of consumers to make payments and repay debt. Similarly, countries are rated by credit-rating firms. Three credit-rating firms determine the country’s credit score: S&P, Fitch, and Moody’s. In August 2023, Fitch downgraded U.S. debt from AAA to AA+, following a downgrade by S&P in 2011 from AAA to AA+. This past month, Moody’s announced a downgrade of U.S. debt from Aaa to Aa1. U.S. debt is made up of Treasury securities, which are how the U.S. government essentially funds ongoing expenditures, the national debt, and fiscal policy initiatives. Treasury bonds are the primary method for the U.S. government to borrow money from domestic and foreign institutions and individuals. Moody’s based its downgrade on “successive U.S. administrations and Congress failing to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.” Moody’s also noted that “the U.S. retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as the global reserve currency.” The most recent credit downgrade may lead to higher borrowing costs for the U.S. government, adding to fiscal challenges and accumulated debt owed to borrowers. Comparatively, countries that currently have the highest credit rating by the three credit-rating agencies include Australia, Canada, Denmark, Germany, and Switzerland. U.S. debt held by the public now stands at nearly $28.9 trillion, or just under 100% of annual gross domestic product. The rise in interest rates since the 2020 COVID-19 pandemic has raised the cost of servicing that debt, to the point that the U.S. now pays more in interest payments than it does on national defense spending.

Sources: Moody’s, S&P, Fitch, U.S. Treasury Department