Weekly Mosaic Update


Top of Mind - Week of July 21, 2025

  • With over a trillion dollars in interest payments a year, it’s understandable why the Trump administration is pleading directly to Federal Reserve (Fed) Chairman Jerome Powell to aggressively cut interest rates. However, the question remains: Does the Fed need to cut, and what would be the secondary impacts if it did?
     
  • Given the seemingly stable labor market and inflation hovering above its 2% target for price stability, the Fed can afford to be patient in its wait-and-see approach, per its dual mandate.
     
  • If the Fed were to move forward with reducing the Federal Funds rate, it isn’t a given that longer-term yields, such as the bellwether 10-year Treasury and closely linked mortgage rates, would follow suit, possibly resulting in a steeper yield curve much like we saw at the end of 2024.
     
  • To directly impact longer-term interest rates, the Fed would need to institute a version of yield curve control (buying long-term Treasuries) like the Bank of Japan had implemented. 
     
  • This would likely cause additional US dollar weakness. When combined with the accommodative fiscal policy provided by the One Big Beautiful Bill, it could create a reflationary environment that the US economy doesn’t necessarily need, yet.

 

Top of Mind - Week of July 14, 2025

  • Second quarter earnings season is set to kick off with the nation’s largest banks on the docket for this week.
     
  • The proverbial bar has been lowered for 2Q as many companies pulled their forward guidance when reporting first quarter results in response to increased trade policy uncertainty from Liberation Day.
     
  • The lack of forward guidance likely contributed to the 4.2% drop in consensus 2Q earnings estimates over the last three months, marking a near 6.5% decline from where estimates stood at the start of the year.
     
  • Declining earnings estimates aren’t atypical, as consensus usually starts at a high level and then begins to lower estimates. However, the magnitude of the decline is worth noting as the average decline in quarterly earnings estimates over the past five years has been 3.0%.
     
  • The combination of falling earnings estimates and stocks continuing to establish new all-time highs has stretched valuations. The market-cap-weighted S&P 500 is back above 22x forward earnings estimates, a premium to its 20-year average of 16x forward earnings.

 

Top of Mind - Week of July 7, 2025

  • On Friday, President Trump signed the One Big Beautiful Bill (OBBB), which combines changes to tax and spending policy and provides an incremental positive for the economy, counterbalancing the uncertainty surrounding trade policy. 
     
  • One of the most impactful elements of the OBBB relates to how companies can depreciate capital expenditures (capex). The bill allows for the immediate depreciation of 100% for certain assets in the same year they were purchased, rather than being expensed over multiple years. 
     
  • This will likely trigger an accelerated capex cycle, benefiting both the economy and corporate earnings while lowering the effective corporate tax rate. However, it may also create inflationary pressure that keeps long-term interest rates elevated, regardless of any adjustments to the policy rate. 
     
  • While fiscal policy has become more supportive, the lingering trade policy uncertainty will likely limit the full impact of the incentives in the OBBB as the 90-day pause on reciprocal tariffs expires this Tuesday. 

 

Top of Mind - Week of June 30, 2025

  • As the second quarter comes to a close, the S&P 500 has successfully climbed “the wall of worry” yet again and is making new highs despite trade policy uncertainty, interest rate volatility, and geopolitical risk experienced over the last three months.
     
  • Uncertainty surrounding tariffs and trade policy sparked a selloff in the equity markets in early April, which nearly sent the S&P 500 into a bear market, down 20% from its previous peak.
     
  • A 90-day pause on the “Liberation Day” reciprocal tariffs (excluding China) was declared a week after the initial proclamation, sending stocks rapidly higher as uncertainty around trade policy receded. By early May, China and the US also agreed to a 90-day halt, giving further cause for optimism.
     
  • Interest rates were also volatile, with the 10-year Treasury yield falling below 4.0% in early April, then jumping above 4.6% by mid-May, before settling around 4.25% by the end of June.
     
  • Geopolitical risk fluctuated as tensions in the Middle East escalated rapidly, driving oil prices from the mid-$60/bbl to the upper $70s/bbl before reverting back to the mid-$60s/bbl.
     
  • Moving into the second half of the year, policy sequencing is likely to shift positively as markets have largely moved past trade policy uncertainty and begun to focus on the potential benefits of fiscal policy expansion and continued deregulation.

 

Top of Mind - Week of June 23, 2025

  • Markets are breathing a sigh of relief as it appears Iran telegraphed a strike on US assets in the region in response to the US bombing of Iranian nuclear sites over the weekend.
     
  • The price of oil plunged in response to this “measured” retaliation. Equity and credit markets are moving higher as markets view this development in the same vein as Iran’s reaction to the assassination of General Soleimani in 2020.
     
  • This is a welcomed development as the flow of oil through the Strait of Hormuz, which accounts for roughly 20% of the world’s daily consumption, remains uninterrupted for the moment.
     
  • While this appears to be a de-escalation between the US and Iran, we are back to where we were on Friday with Israel and Iran continuing to trade blows.
     
  • Despite this seemingly positive development, the risk of higher oil prices and corresponding negative impacts on markets and inflation remain as tensions between Israel and Iran persist.
     
  • A prolonged closure of the Strait of Hormuz is likely a low probability event as it would be counterproductive to Iran’s economic needs. The bigger risk lies in the possible targeting of Iranian export facilities, leading to structurally higher energy prices.

 

Top of Mind - Week of June 16, 2025

  • When the Federal Reserve meets this week, it will have yet another reason to continue its “wait-and-see” approach before resuming interest cuts as oil prices leapt higher on Friday in response to the Israeli attack on Iran. 
     
  • For monetary policymakers across the globe, lower energy prices have been a welcome relief, as they helped alleviate a portion of the lingering inflationary pressure. However, with tensions reigniting in the Middle East, the continued trajectory of lower energy prices is now in question.
     
  • Should energy prices continue to rise, it will be incrementally more problematic for energy importers such as Europe and Japan than for the US, which is a large energy producer.
     
  • Before the conflict in the Middle East broke out, the European Central Bank (ECB) had delivered four interest rate cuts to their policy rate as inflation in the EU had been moving comfortably back towards target, while the Bank of Japan (BOJ) had been the only major central bank working to tighten monetary policy this year as inflation in Japan has trended higher. 
     
  • Provided the renewed level of uncertainty driven by the Israel-Iran conflict, the Federal Reserve may not be the only central bank instituting a “wait-and-see” approach moving forward. 
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