¶ Intro / Opening
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's head of U.S. macro strategy.
¶ Introduction to the MUFG Podcast
It's Tuesday, July 15th, 2025. Welcome back to the podcast, George.
Greetings to be on, John.
Always good to have you. So let's see here. So it's been a couple of weeks since our last episode, and not surprisingly, there's been multiple major developments. I guess top of mind, you know, we got an optically better than expected employment report, although, you know, I would argue, and I think you'd agree, there's definitely some weakness under the hood. That being said, you and your team took that as an opportunity to change your
Fed and your rates view. So I'd like to kind of go through that a little bit. We're also recording this podcast, as I mentioned, on Tuesday, July 15th, following the softer than expected, but again, you know, the devil's in the details there, but the softer than expected CPI report.
¶ Analyzing the Latest CPI Report
Why don't we start there? So CPI came out, the headline was up 0.3% month over month. The core was up 0.2% month over month, but we talked about maybe some underlying strength, perhaps, you know, in showing that maybe, maybe some of the, maybe there is some inflationary pass through from, from recent tariffs. Why don't you take our listeners through that? Yeah.
It's almost in an odd way, similar to the experience that we had with NFP, where the headline numbers don't necessarily capture what's happening under the hood. And I do think that there's an element of that taking place today as well, or with the recent release of the June CPI data. I mean, at first blush, 0.3, 0.2 is actually better than expected. I mean, or it could have been much worse. There was concerns that you're going to see a full pass-through of the tariffs.
And again, the tariffs on average are running between somewhere like a weighted average of like 0.1. I think 9% on its way to double digits. We'll see what happens. We'll talk about tariffs later. But the tariffs haven't been that high. But there was concerns that it was going to flow through. And it could have been a 0.4, but it was a 0.3. Still better than expected on the headline. 0.2 on core, which is where it really matters. But yet, you had a very kind of muted reaction initially.
Markets and rates did rally slightly and then gave it all back. And really then focused on these kind of super small categories, which in total add up to about 5% of the basket, which is household furnitures and supplies and recreational goods, both up close to like 1% month on month, which is a pretty big jump if you annualize that.
And very not typical. We've actually seen both household furnishing and supplies and general recreation goods after the big bump coming out of the pandemic has been declining or closer to zero on average. And it's been flat to very low inflation. So it is the first telltale sign. And since the markets were so laser focused and trying to identify a tariff flow through, that's what really got the market's interest shifting towards that, oh, there's evidence now that it's coming through.
And given that the tariff rate is so low to begin with, like, what would this look like if it's at 20 percent or 30 percent, some of these bigger numbers that are floating out there? So I think that's what caught the market's attention.
Yeah, and the market did reprice. I mean, we're seeing, you know, the 20-year and 30-year bond yield above 5% for the first time in a bet.
Exactly, exactly. So, yeah, definitely. I mean, I'm trying to, as I think we'll talk about next, stay open-minded around, like, what this means for our views. I think market's overreacting, but we'll see. Okay.
¶ Updates on Tariff Developments
Well, that sounds like the perfect segue here. So, you kind of alluded to tariffs, but there's been some significant developments since our last episode on that front. You know, it's obviously a quickly evolving situation, but, you know, my understanding is the administration has said that new higher tariff levels will go into effect with the EU and I believe Mexico, although perhaps with Mexico, it's less impactful given most goods are USMCA compliant.
But particularly with the EU, things have gotten contentious. Tell us what that's, you know, give us an update as what's happening there and what are the macro and market implications.
Yeah, exactly. So once we got through the big, beautiful bill, which we'll get to in a moment as well, but once we moved beyond that, our focus shifted to the tariffs. President Trump has sent multiple dozen letters. I mean, I've lost count now. Many letters have been sent out. I think it's well into the upper 20s, if not more, to various countries with different tariff rates and different sort of proclamations more than anything else.
And to us, this feels more like an extension of the original sort of deadline extension to July 8th. Now it's moved to August 1st.
And there's still some time.
We're in the middle of July. We still have two weeks or so to go. I think a lot of this is just buying time. And some of these are very complicated negotiations that have to take place. And we have to see how much time is needed. But it does line up to the end of the month where, if you recall, that U.S. Court of International Trade that did deem that the International Emergency Economics Power Act, the IEPA, which is what President Trump has been using.
They kind of cited it as like an overstep. And then that was at least temporarily paused by the Court of Appeals for the Federal Circuit that temporarily put that on hold and allowed the tariffs to kind of still be used. I think it's just kind of, it's too much to be coincidental that July 31st is a temporary.
Extension or the temporary appeals end date for that tariff assessment or if it's going to be binding or not and then august 1st will be when the extended pause of these sweeping tariffs will go into effect so i think this is almost kind of like teeing it up so that we'll know what the view is from the courts and then either they are in line with what president trump is trying to do and then he doesn't have to contest it or maybe this might have to go
to the supreme court we don't know so i think like this is all kind of lining up towards the last week of the month is going to be, and into that first day of August, it's going to be a pretty, another one of those major action packs weeks. It might be like the last major action pack week of the summer, maybe we'll see, because it's going to be a lot of stuff to go through. So I think the jury's still out to make a call that we're going to get these supersized tariffs.
But if we're wrong, the sort of numbers that are being thrown out there. It's hard to them not being inflationary at some point because there's going to be some sort of burden sharing amongst both the exporters, the countries and the companies themselves, as well as the importers. And then ultimately the consumers and the retail and whoever's using these various inputs into their business. If we're talking about anything above 15%, it's going to be hard not to see inflation pick up.
And that really does make it challenging for how to think about the Fed going forward. So, yeah, there's a lot there. And I think the tariffs, we just got to really get to the end of the month and see what happens.
Yeah, market seems pretty sanguine that the U.S. and the EU will come to, you know, come to some sort of mutually agreeable solution, you know, kind of like their, you know, which has sort of been the playbook thus far, the taco.
Yeah, market's sanguine on everything, yeah.
¶ Discussion on the Big, Beautiful Bill
Yeah, sure is with equities, you know, at or near all-time highs, that's for sure, amidst all this uncertainty. You did mention the one big, beautiful bill, which I think President Trump signed into law at or around July 4th. There's a lot of, maybe not a lot, there's certainly some stimulus in there. And then I guess the other development is the Fed's been sort of, seems to be stubbornly unwilling to cut rates, certainly in President Trump's view.
You know, but so it certainly seems there's maybe some, you know, what's changed recently is there's some stimulus or, you know, either in train or in our future. The Fed's going to, you know, perhaps be a little bit more restrictive, all other things being equal. I'm curious how that impacts your view, the framework you're using.
You published an update on your, maybe this is a good opportunity for you to remind us on what you're expecting the Fed to deliver in terms of rates cuts this year, where you see rates shaking out this year, next year, that sort of thing.
Yeah, let's maybe just briefly touch on the big, beautiful bill, the HR-1, really the extension of the TCGA actual first Trump kind of tax cuts that were set to expire this year. Like first and foremost, it would have been a pretty big fiscal cliff. And so is it really stimulus or is it just kind of status quo? We've been more that it's a status quo when it comes to the various kind of individual income tax brackets.
There's some pieces of stimulus within that bill that is additive, but if you score it and if you actually look at it versus other fiscal plans that have been launched over the last four or five years, it's still not that massive of a bill. It's really a continuation of business as usual with some new added features like the no tax on or reduced tax on overtime, as well as, you know, just tips, as well as some adjustments to Social Security.
The big news there in the big, beautiful bill is more the sort of kind of small business friendly depreciation and accounting sort of treatments, which I think will definitely be pro growth in the years to come. I just don't know about it in 2025. Like it's the middle of the year. We're going into summer break. There's, you know, we're in the summer break and basically like who's starting a major project at this point in the year.
So I think some of these more medium term benefits from the big, beautiful bill will come out in the years to come. And so I don't see it being that stimulative. And I know that markets love to always think that there's new stimulus always in the pipeline. And this to us scores, you know, kind of like as a mild enhancement.
It's not enough for the Fed not to ease. I still think that the Fed has a role in its place for the economy and for the banking system to kind of get, you know, just cheaper funding into the system. And that would help out both the small businesses, the more marginally attached and lower income individuals and things like that. So there's a role for why the Fed has to cut rates. But they are, as you say, and I agree, they've been stubbornly not cutting rates for a lot of different reasons.
They point their fingers towards the tariffs and the concerns around inflation. And then you get a CPI report like today and the markets are kind of, I think, again, as I said earlier, overemphasizing these really small categories that are seeing evidence of tariff pass through. But it doesn't really help the cause that should be cutting sooner.
So we we did change our view and if those that are not you know receiving the actual direct reports you can go to the mufgresearch.com website but we changed it after the nfp as we as we kind of suggested we would that if nfp was you know stronger even though it was optically stronger it was enough to kind of take the odds out of a july cut which is what we had initially we moved it now to september we still think that the neutral rate is closer to the you know mid to low 3%,
and the Fed's closer to 4.25, 4.5. And so they're still 75 to 100 bps too high in our view. And the sooner they cut, they kind of at least would help augment the sort of stimulus packages that are going on throughout the fiscal side. And it could quite possibly avoid us having a downturn unnecessarily, so if the Fed kind of got involved.
¶ Fed Rate Expectations and Economic Outlook
There is still weakness that we're seeing in the labor markets,
And there's still this high level of uncertainty, and we don't know how the tariffs are going to land. And so there's still enough of potential catalysts that could slow down things. But I think at this point, we've taken down our odds a lot on the recession call. We're really just looking for the Fed to provide this sort of kind of elongating the business cycles, if you will, is what they should do. So we have 75 to 100.
We have the next cut in September. for what it means for our general rates views.
So just to be clear here, you're expecting that 25 basis point rate cut in September. And then how many cuts do you have for this year?
We have three, which is one more than what's currently priced in and more than what the Fed's last SEP forecast suggested, which remained at two. We think that, again, all we really did with our forecast was shift it out by one meeting. We've kept our overall target that the neutral has not changed right.
Yes you have your your kind of terminal is at three and three-eighths if i'm not mistaken
That's right yeah.
And then what about further out the curve you know we've as i mentioned you know the the long end is sold off you know ever so slightly beyond five percent you know front ends kind of approaching you know four percent kind of where do you where do you see where do you see the curve settling in later this year
Yeah we're we're now up against our upper end of the range for where we think tens based purely on fundamentals a getting notably above 450 is not impossible but but staying above 450 we don't we don't think it makes sense we think the value is starting to be created and you mentioned earlier the 20 year and the 30 year sector the same thing holds true there so you know five percent long-end bonds and.
Four and a half tens or higher we do think it's starting to offer value so we we would start to kind of average in here uh the two-year similar i i would like to see the two-year closer to four and actually get back to a four handle and then see like how that the market trades then the issue with all these things you know kind of going back to our fed view is that that the very front end still remains negative carry as long as the fed doesn't cut whereas
whereas the longer whereas the Longer-term tenors at least give you some yield protection if you are more of a leveraged investor. And so we think that it caps the sell-off in long-term rates. That said, this could be a whole other topic one day later in the future about what's going on with global rates, especially with yen rates and the sort of big move in just general duration shedding around the world is pushing up long-term rates.
So it'll be hard for U.S. rates to completely decouple from that.
¶ Global Market Influences and Fiscal Concerns
So I'm not living under a rock. I'm very aware that there's a correlation with global markets, and I'm not going to be remiss to that. But we think just based on pure fundamentals and what we're seeing on the tax side, the big, beautiful bill being out of the way, and there's some tariff revenue coming in. I'm not so concerned now about the fiscal outlook.
Yep, absolutely. That seems to be a topic that gets sort of hotter and then fades into the background. But certainly a topic, as you allude to in Japan, we've got the upper house elections this weekend. And the long end of the JGB curve's gotten destroyed ahead of that. And I think there's some fear that the ruling coalition will lose its majority.
And therefore, some of the minority parties will be able to push through some stimulus, which is a big deal in a market where, I mean, correct me if I'm wrong, where debt to GDP is like 300% or something crazy like that.
Yeah, it's up there for the government side. And I'm sure for all debt, I'm sure it's close to that number. yeah no it's it's it's, it's a precarious time and people are on edge around these sort of fiscal spending packages and countries like sovereigns with a lot of debt so this is true for the uk.
Yep uk us japan for sure very very topical so so point taken fundamentally those are your views but if you know markets become unhinged in japan or the uk or elsewhere or don't you know the treasuries are not on an island unto themselves.
Exactly.
¶ Conclusion and Closing Remarks
All right. Great stuff as always, George. You know, I don't think we have a specific research piece to highlight, but I would remind our listeners, if you're not receiving George's strategy reports, do check out the MUFG research portal at www.mufgresearch.com, where you can find all of your favorite MUFG research, as well as to sign up to have it conveniently delivered to your inbox. Great stuff as always. Thanks a lot, George.
Thanks, John. Thanks for hosting.
And thank you for listening to the MUFG Global Markets Podcast. Rate, review, and subscribe on Apple, Spotify, or wherever you get your podcasts. And reach out to your MUFG sales rep for any further information. Check back soon for more insights from the Global Markets Research Team.