Daily Newsletter 5/6/25
Market expectations for Federal Reserve interest-rate cuts have shifted significantly over the past week, with investors now anticipating fewer reductions than before. As long as the labor market remains strong, the Fed has little incentive to take action.
The Federal Reserve’s dual mandate-set by Congress in 1977-requires it to pursue both maximum employment and stable prices (meaning low, predictable inflation). This dual focus is unique among central banks, many of which are tasked only with controlling inflation. The dual mandate forces the Fed to constantly balance two sometimes competing goals, and today’s economic environment-with persistent inflation risks and a resilient job market-makes that balancing act even more challenging. Trump’s sweeping tariffs, the largest in a century, have created a situation where the Fed is being pulled in two opposing directions at once:
Tariffs are raising inflation: Import taxes are increasing costs for businesses and consumers, pushing up prices and threatening to keep inflation above the Fed’s 2% target.
Tariffs are slowing growth and risking jobs: At the same time, tariffs are hurting manufacturing, weighing on business and consumer confidence, and have even contributed to a contraction in U.S. GDP last quarter. Some major companies have warned of profit declines, and airlines have withdrawn guidance due to uncertainty.
Last week, both Microsoft and Meta released earnings that exceeded Wall Street expectations and had a notably positive impact on the stock market. This week’s earnings releases have generally been more mixed compared to last week’s standout results from Microsoft and Meta. Last week, both companies significantly beat expectations, driving strong gains in their share prices and boosting overall market sentiment, particularly in the tech sector. This week, Palantir delivered strong growth and raised its outlook but saw its stock drop on high expectations. Ford beat forecasts but reported sharply lower profits and withdrew guidance, leading to a negative market reaction. Although Ford produces about 80% of the vehicles it sells in the U.S. domestically-which cushions the blow compared to competitors like General Motors-the company still faces significant expense increases, especially for models and parts imported from Mexico and China.
Despite strong results and increased guidance, Palantir’s stock fell sharply-dropping about 9% in premarket trading this morning. The decline reflects high investor expectations and concerns about slowing customer growth, performance in Europe, and broader market valuation pressures.International commercial revenue declined by 5% year-over-year and 11% sequentially, mainly due to ongoing challenges in Europe, where AI adoption remains slow and growth opportunities are limited.
We support efforts to make the terms of trade more equitable, but we do not agree with using broad tariffs as a means of generating revenue. The plan fails to consider how other countries might react.
Friedrich Merz, leader of Germany’s Christian Democratic Union (CDU), faced an unexpected setback, during the Bundestag vote to confirm him as Chancellor. We have been closely monitoring European markets as usual. Given the recent political developments in Germany, we anticipate making significant adjustments to our Europe-focused portfolio, which is currently heavily weighted toward Germany. We are considering increasing our exposure to Poland and other European economies in response to these changes.
We believe that gold is experiencing a long-term breakout. This is due to the fundamental imbalance between supply and demand.
OPEC+ has decided to accelerate its oil production increases, announcing a boost of 411,000 barrels per day (bpd) for June 2025. Oil prices have dropped to multi-year lows-falling below $60 per barrel-following the announcement. The market is concerned that the additional supply could outpace demand, potentially leading to a global glut.
OPEC+’s decision is a calculated attempt to stabilize the oil market, but with prices already under pressure, the risk of oversupply remains a key concern.
The break-even oil price per barrel for U.S. drilling companies currently averages $65 per barrel (large producers about $61 per barrel) to profitably drill a new well, according to the latest Dallas Fed Energy Survey. Low prices could lead to increased mergers and acquisitions, as smaller drillers may encounter financial difficulties under current market conditions.
Both Chevron and ExxonMobil reported significant declines in profits. This could be interpreted as evidence that the oil industry is weakening due to the impact of tariffs and global trade tensions.
A VIX reading over 24 signals elevated market volatility and heightened investor anxiety about the next 30 days. Historically, a VIX above 20 is considered “high,” indicating that traders expect larger-than-normal swings in the S&P 500-roughly 1.5% daily moves when the VIX is at 24. This level often reflects uncertainty, fear, or concern about potential market declines, and is typically associated with periods of market stress or negative news flow
OUR TRADES
This week, we are positioning our tactical trades with a focus on two major events: the FOMC meeting and the upcoming earnings reports.
We anticipate heightened volatility around the FOMC rate decision this week. Additionally, we expect notable moves in gold and European stocks during this period.
We also anticipate some earnings reports that may break existing trends, which we view as a normal part of the market cycle.
If you found this post valuable, please consider subscribing. We provide high-quality macroeconomic and financial analysis and education for anyone eager to deepen their understanding of the financial markets and the economy.
Additionally, a subscription gives our paid members instant access to our portfolio.