INCOME & SPENDING
Personal income fell 0.4% in May, while personal spending dropped 0.1%.
Our Take: Consumption in March was solid as consumers increased purchases before tariffs hit. Since then, real spending grew only slightly in April and fell in May. Year-over-year, real consumption growth is positive but trending lower as the effects of tariffs, along with genuine fiscal and monetary uncertainty, continue to weigh on the economy.
INFLATION
The core Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred measure of inflation, rose 0.2% in May and is up 2.7% over the last twelve months.
Our Take: Both the monthly and year-over-year core PCE indices rose slightly more than expected. While Federal Open Market Committee (FOMC) members appear split on whether to ease, the Fed is likely to continue to hold rates at their current level until further progress is made toward their 2% target or the economy meaningfully slows.
FED
There was a noticeable uptick in commentary from FOMC officials this week, and while the overall message remained focused on patience and data dependence, subtle differences in tone began to emerge. In his testimony before Congress, Chair Powell reiterated that the Fed is not in a rush to cut rates, emphasizing the need to see more evidence that inflation is moving sustainably toward 2%. Meanwhile, Governors Christopher Waller and Michelle Bowman struck a more dovish note, suggesting rate cuts could begin as soon as July. Chicago Fed President Austan Goolsbee noted the central bank could resume interest rate cuts if inflation remains subdued, but did not hint at any specific timing for the move. Others like Governors Neel Kashkari and Mary Daly think cuts in the fall are more appropriate.
Our Take: While no Fed official signaled an imminent pivot, the growing divergence in views suggests some daylight is opening up among FOMC members on how restrictive policy is and when to begin easing. This shift likely drove the move lower in rates this week, as markets start to lean into the idea of a sooner-than-expected cut.
TRADE
Commerce Secretary Lutnick stated that the U.S. and China have finalized a trade understanding and that deals with 10 other major trading partners are imminent and likely to be signed prior to the expiration of the 90-day pause of reciprocal tariffs announced on April 2. The Chinese Commerce Ministry confirmed the understanding. Markets rallied on the news.
Our Take: It is encouraging that trade talks are likely to result in much lower tariffs and trade restrictions than those announced on April 2. The tariff levels will still be much higher than they were prior to the Trump administration’s imposition of sectoral and reciprocal tariffs, and the balance of effects on inflation and growth will take time to play out.
MIDDLE EAST
Following weekend U.S. airstrikes on Iranian nuclear facilities and a token retaliatory missile attack on a U.S. base in Qatar, the U.S. imposed a ceasefire on Israel and Iran that has thus far held. Crude prices have retreated back to the levels seen prior to the Israeli air campaign.
Our Take: Markets are taking the view that Israel and Iran are finished with open hostilities for the time being, and that the conflict was contained and will not result in attacks on regional energy facilities or a closing of the Strait of Hormuz.
MUNICIPALS
The Ohio General Assembly passed House Bill 96, the biennial state budget. The bill was passed along partisan lines, supported by Republicans. The budget includes a new 2.75% flat income tax, which will be phased in starting in the next fiscal year. Currently, the income tax rate is 3.5% for earners of over $100,000, 2.75% for earners of $26,051 to $100,000, while earners of less than $26,051 do not pay income tax. The rate for the highest earners will drop to 3.125% for the next fiscal year before dropping to 2.75% during the second year of the budget. Opponents of the budget bill argue that the flat tax only benefits the wealthy. Supporters assert that the flat tax will make Ohio more competitive with surrounding states and simplify the tax code. Republican Governor Mike DeWine is expected to sign the budget bill before July 1.
Our Take: Should the flat tax become law, Ohio would join 14 other states with a flat tax. Estimates show that the change to the income tax could lead to a cut in income tax revenue of over $1 billion. However, many supporters believe that the tax cut will lead to a stronger economy in Ohio.