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Brian Pietrangelo [00:00:02] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, July 18th, 2025. I'm Brian Pietrangelo, and welcome to the podcast. With that, I would like to introduce our panel of investing experts, here to provide their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions, please reach out to your financial advisor.
Taking a look at this week's market and economic news, we've got four key economic updates for you, and we will begin with probably the most important read for the week, which is the inflation update as measured by the Consumer Price Index measure of inflation. And both came out very hot in terms of updated reads from prior months. So for a month over a month on all items over CPI, for the month of June, a 0.3% increase, which was higher than the prior two months. And if you exclude food and energy, which is core inflation, it's at .2%, which was also heading in the wrong direction, which it was up. Then we take a look at the year-over-year numbers in the same vein, and June was also higher at 2.7% year- over-year for all items and 2.9% for core excluding food and energy, again, which probably the most important number as the Fed does look at some of these numbers relative to core inflation. And it is higher than the previous three months at 2.8%. Now, this is important because the Federal Reserve does meet at the end of the month on July 30th, however, we will get the second type of inflation report later on in the month known as PCE inflation.
Second, we had the advance number for retail sales, which is a proxy for the overall spending, one of the numbers we take a look at for the consumer. And retail sales for the month of June 2025 did come in in a positive manner at 0.6% positive for month over month advanced monthly retail sales. Now again, this is important for two reasons. Number one, because the prior month in May was a significant decline at minus 0.9%. And it had begun to give us the question as whether they were advanced buying in terms of pre-buying before tariffs or if this was indicating a slowdown in the overall economy relative to consumer spending. So, to see a positive 0.6% in the month of June was a good number.
Then third, on the other side of the economy, when we look at manufacturing, you can take a look at the industrial production report, which also was pretty good for the month of June, and it came in at a positive 0.3%. Now that's good because it's headed in the right direction in a positive nature. It's also good because the prior two months in both May and April were at roughly zero, and March was also at a negative 0.3%. So we reverse the prior three months, March, April, and May, that were negative or even and come to a June number that was a positive number at positive 0.3% percent, again, headed in the right direction for industrial production.
And finally, the fourth data point for you this week is an update on the Federal Reserve's Beige Book Report. And again, reminder for everybody out there as our listeners, the Beige book report comes out two weeks in advance of the next upcoming Federal Open Market Committee. And in this case, it's two weeks prior to the meeting coming up on July 30th. The report did show that overall economic activity did increase slightly from late May through early July with five out of the 12 districts reporting slight or modest gains, five had flat activity, and the remaining two districts noted modest declines in overall activity. Now this was a slight improvement over the prior report, however, uncertainty did remain elevated, contributing to overall caution by businesses.
So with that report, we add to the equation that when we come up with the Federal Reserve meeting on July 30th here, it will be very close to a number of items, those being number one, the extension or the second extension of the tariff pause by President Trump extended to August 1st. So that's right before that. Then we also have PCE inflation coming out after the Federal Reserve Open Market Committee in two weeks. And then on the Friday of the same week, we get the employment situation report relative to labor. In addition, there's a lot of rhetoric between President Trump and the standing of Jay Powell, the Federal Reserve chair. So we will go right into our panel today to Rajeev to get his thoughts on the upcoming federal open market committee. What are the chances of a rate cut and what are the chances of President Trump taking some type of action on Chair Powell before May of 2026, when his term is up, Rajeev?
Rajeev Sharma [00:05:08] Well, Brian, the June CPI data came in a little hotter than expected. And now once again, market expectations for rate cuts get recalibrated for this July 30th FOMC meeting that's coming up with the annual rate moving away from the Fed's target, which is 2%. And now that's not really a recipe for a July rate cut, and I don't think anybody's expecting a July cut. So currently market odds at July for a cut stand around under 5%. So you might as well discount all of that. But the Fed is likely to stick to this narrative of a wait and see approach, which they've been doing for a long time. And now they're gonna point to stubborn inflation and a resilient labor market. Fed Chair Powell is likely in his press conference gonna reemphasize the importance of data dependency. And the latest CPI does not really warrant the Fed to be preemptive with rate cuts. They're not gonna try to do a policy error here. They're going to keep to their guns and kind of say, okay, we're not doing rate cuts until we start seeing inflation move towards their goal. Eyes right now are back on the September meeting. Market odds right now for a September rate cut are around 60%. But if we see inflation continue to accelerate for whatever reason, whether it's tariffs or whether it is wage pressures, the Fed may decide to postpone that rate cut as well. And now there's a growing contingency that's thinking that maybe we don't get a rate cut into the fourth quarter or maybe even into 2026.
So how does all this impact the bond market? If you look at the yield curve and the way it's been behaving in the last few weeks, the front-end yields have been moving lower at a faster clip than longer end yields. And that is the steepening trade. Front end yields are most sensitive to Fed policy while longer ended yields are more sensitive to economy and inflation. Investors who placed the steepening trade early last year or late last year into this year have benefited from this trade from the continuing steepening of the yield curves. And we have also taken part of the steeping trade We don't believe that this time it makes any sense to really add duration to our portfolios. You just are not being compensated for that kind of interest rate risk to go further out on the curve. As we look closer at the 10-year, right now we remain pretty far from 5% levels. Many people thought we would get to 5% on the 10-year this year, that did not happen. It happened once and it came right back down. There are several reasons for this actually. You have a dovish Fed; they're still projecting rate cuts. The last projections were that two rate cuts for 2025. So as long as that's still there, you're not gonna see the 10-year really gravitate to 5%. Also, front-end yields have moved lower and that's put a lot of pressure, it's reduced the pressure on longer-term yields like the 10-year. The markets continue to price in easing, not tightening. And that's the natural pull down of the yield curve. And we're gonna see that continue for, I would say in the near term.
But there has been a lot of uncertainty in the market. We've talked about uncertainty before. But now the uncertainty has become a very different color right now. And you have, it's all about really the future of the Fed Chair Powell. So, we heard the news this week that Trump has been contemplating firing Fed Chair Powell. It does bring into question the independence of the fed. In my personal opinion, if this were to happen, you would have the potential for a very disruptive move in the markets. Trump has pretty much backtracked from some of his rhetoric later this week and said it's highly unlikely that he would fire Powell unless it was fraud. And I think this may have a lot to do with legal constraints that are involved here, potential market fallout. But the bond market is taking all this, in my opinion, in stride. If you look at the move index, which is a gauge of Treasury market volatility, it spiked on July 16th, right when the news came out that Trump may fire Powell. Intraday moves on the move were pretty significant, but then they came right back the next day. And I, and I think that shows a lot of the resilience of the bond market right now. If Powell were to be removed, it could undermine the confidence of the Fed's independence, as I mentioned. It could lead to higher term premiums and a steeper yield curve. But if we're looking for follow through volatility from all this noise that we're seeing in the market right now, it did not happen. The MOVE index actually came back and it's kind of been a little more stable, if you will. Now, even with all this noise out there, I think that if you think about who would take Fed Chair Powell's position after he leaves, or after he has exited, it would still be somebody in the market's opinion that would be somebody dovish. So, it's still putting pressure on the front end that we would have rate cuts. Whoever gets into that seat, it's most likely that they would be a dovish Fed member and that person would advocate for more rate cuts going forward. So, I really think that all of this is playing into the market. If you look at the economic data, you don't think that we should have rate cut right now. If you're looking at the political uncertainty that's happening right now, it keeps rate cuts still in play.
George Mateyo [00:09:56] So I think that's a fair characterization, Rajeev. I think it is important to note that during the, I guess, on again, off again, market reaction to what happened, I guess on Wednesday, when this rumor started to really take hold is noteworthy in the sense the market did reverberate a little bit. You know, we saw yields jump up a little bit. We saw equity markets sell off and people were kind of a little bit panicked at the time, although it wasn't a full-fledged panic, to be sure. But I think we do have to be careful of this. And you pointed out the fact that if there are grounds for removal that Trump would cite for removing Powell early, it would be this notion that he's committed some kind of fraud. And that of course is, you know, a pretty tricky definition and a needle to thread. But I think overall it can be somewhat disruptive if not careful. And I think the bigger consequences I see is, you know the market's going to react how it's going to react in the short term if this does happen. It's highly likely that Jay Powell will not be reappointed for another term. So, I think the market's kind of already discounted that to some extent, but the question is who comes in next? And you're right to point out that that's going to be something closely watched once maybe some short-term volatility takes hold, if this change is more abrupt in nature than anticipated. And I think there are consequences for that.
In other words, when we saw this in the past, and there was a little bit of precedent here, I think back in the early 70s, when President Nixon at the time was very critical of the Federal Reserve, and frankly, all presidents in the modern era have been critical of the Federal Reserve at one point or another, irrespective of Republicans or Democrats. I think most presidents want to see a stronger economy for obvious reasons. And sometimes, you know, the Federal Reserve has to go against that pressure. But in the case of Nixon, I think it was interesting in the sense that the Fed did acquiesce a little bit. I think they cut rates, maybe roughly 200 basis points or about two percentage points, if I'm not mistaken. And soon thereafter, inflation took hold maybe a year or so later. And there were consequences for that. That was the time in the early 70s where inflation really ramped up, growth slowed, and we had this environment of stagflation, which the market didn't really respond too kindly towards. So, I think there are some consequences of this.
I think there are parallels that people are trying to draw between what's happened in emerging market countries where it's been a little bit more commonplace. I'm not sure we're emerging market economy by any means, but nonetheless, I think there are some precedents that give people pause when thinking about what could happen next there. So I think we have to keep our eye on this.
I think with the knowledge the markets seem a little bit complacent towards risk in general as we kind of go through the summer, there are some good news stories to be sure. And you pointed out some of those where inflation is behaving a little better than expected. To be sure some of the numbers behind the numbers, if you will, have shown some stickiness towards them. And maybe, again, maybe those are tariffs that are starting to kind of come through. The impact of tariffs is starting to come through on the inflation side. But we also saw pretty decent numbers on the claims numbers where people that were filing for unemployment insurance went down last week, which is certainly welcome news. And then thirdly, retail sales bounced back up, which I think is something that Brian mentioned, as well as being kind of a harbinger for maybe future growth in the economy. So overall, it seems that the economy is doing okay right now. It's not running away on the upside. It's clearly a little bit on the job market, but not really too much on the downside. So maybe interest rates probably are where they should be right now, all else equal. I think the other thing, Steve, that caught my attention is just the unprecedented rise of a certain number of tech stocks. And now we're back at peak concentration levels where a couple of stocks now are representing almost 40% of the index again, as measured by the S&P 500. So are you, Steve kind of seeing any read through with earnings so far, or how are you thinking about just this level of concentration in the equity market today?
Stephen Hoedt [00:13:29] Well, George, I mean, it comes down to the market yet again. Another week passes and another set of new all-time highs, right? And, you know, we've kind of been talking about this for a while, that the setup was really favorable for stocks. Through the month of July. Post-July, it gets a little bit more dicey, but likely August should be okay too before we head into the typical seasonal swoon in September and October. These new highs, as you mentioned, have been driven in large part by both the economic data coming in in a positive fashion, whether it's inflation, or growth, or the tariff impact, or what have you. The equity markets have been willing to look on the bright side here lately. And earnings have been coming in good from the early reporters. 88% of the companies that have reported so far have beaten expectations. There have been a couple of notable laggards in healthcare and consumer staples, but generally speaking, we've seen earnings get off to an upbeat start and that's helped as a tailwind as well. So, when you've got economic data coming in favorably, you've gotten earnings coming in favorably, and you've got the macro backdrop being, charitably less bad, but really actually pretty good. You know, the market, you know, the Powell business on Wednesday, I would just chalk up as a kerfuffle. And we're on our way, you know, continue continuing, continuing higher here until proven otherwise. I mean, it's going to take something significant to derail the rally in this market is my view at this point.
And, you, know, when I look at the concentration you're right. I mean, I looked at the S&P 500 this morning on my Bloomberg terminal, and almost 34% of the benchmark is tied up in tech. And you've got - if you want to call it tech plus - if you strip out some of the stuff that's in comms services and consumer discretionary, namely things like Amazon and Netflix, what have you, you're up over 40% very clearly, but I would tell you that, you know, when you look at the, the margins that these companies are, are putting forth and the earnings power that they have, um, you know that there's a reason why we've seen these firms performed really, really well over the last 10 years. And they've kind of acquired that market share within the S&P 500, not by default, but because they've seized it. So yeah, I think that while we're not as used to seeing markets this concentrated in the U.S., if you look around the world, there are a lot of benchmarks that have concentration. And I think when you've got companies that have done what the Mag-7 have done in terms of growth and profitability, it's hard to argue against it. I think it's something that we're having to get used to, and I don't think it's gonna be anything that goes away anytime soon. So, you know, I think that the real question that we have to ask ourselves is, okay, if these ones are gonna trade at a premium, what's the right multiple for all the rest of this stuff? Um, and, and what are the prospects for all the rest of the stuff? Cause if you look, I mean, the market is basically trading those seven stocks at 32 times, the rest of the market's trading at 21 times. And the average for the market is what, 23, 24 right now. I think we're getting close to it. So., I think that the question is, do you start to go through that exercise that I just went through and strip that out and try to understand what the right multiples are for the different pieces of the market as opposed to looking at the market, as a whole, because of that dominance. So, I think we're all going to have to start to look at things through a slightly different prism going forward.
George Mateyo [00:17:36] Do you think, Steve, that there's any risk with, I guess, antitrust or regulatory concerns? I mean, I think the last time we saw one stock jump up to 70% of the overall market capitalization of the broader market was I think it was either IBM or AT&T. And I think in both cases those companies were essentially broken up a few, maybe months or quarters years later. I forget exactly how quickly that breakup occurred, but there wasn't any trust backlash when these companies get to be so powerful that you see some outside force steps in. Is there any risk on the horizon with respect to those concerns?
Stephen Hoedt [00:18:09] So when I look at the various Mag-7 names, look, the government has had Microsoft and its crosshairs at different times over the last 20 to 25 years and hasn't been able to do anything to the company's business model. Essentially, all their efforts have failed. When I look at the names like Nvidia, I don't really see a case for antitrust with Nvidia. The ones that I do think could come under some pressure are the names that are linked to social media, advertising, that kind of stuff, namely the the Metas and the Google/Alphabets of the world because, you know, the government has been very outspoken about its approach to those ones. And you could argue that it's easier for the government to point to pieces of those businesses, whether it's Instagram with Facebook or whether it is YouTube or the Android operating system with Alphabet, pieces of those businesses could be broken off by the government. And I don't think it would destroy the core business. How do you go to an Nvidia and break off a piece of its chip business? Like, I don't know how you do that. Like they're just dominant in that market right now. Nobody else has stuff. I don't know what you do. I don't know what the solution is to their market dominance. I would argue that if you look over time, a company like Broadcom in the semiconductor space, which is creeping up to that Mag-7 level, has a tremendous opportunity to kind of take share in custom silicon. And we see custom silicon taking more share relative to just buying chips from the Nvidias of the world as we move forward in this whole AI revolution. So I think that that's probably more your natural market-based solution to the concentration issue in the chip space.
George Mateyo [00:20:19] Well, I think you're right to mention just valuations again. And then Rajeev would probably say the same thing, excuse me, with respect to credit spreads, where again, risk is pretty low and spreads are tight. So there really isn't a lot of fear in the market right now. And I think to some extent, you're right, Steve, to mention that valuations probably are a bit different today than they were in the past, in the sense that the broader economy today is less cyclical than it was in the past. You could argue that maybe just there's more stability in the economy. Maybe people take question of that, but certainly there's certainly more productivity the economy as a result of some of these things we've talked about. And we're also seeing probably more support for just equity markets in general from investor flows and some other things as well. So, I think from us, you know, it's hard to say exactly what could dent things. I think the recession risk has come down quite considerably. I think some of the trade tensions that we talked about earlier this year have not gone away, but I think they've ebbed a little bit and I think that they still could probably resurface at any moment. So, I think from our perspective, I think it's important to really remain balanced towards risk in general, kind of know what you own and why you own it. And then think about really just incorporating more diversification in your portfolio because there are things that could change at any moment. But being balanced towards risk in general I think is really the best tack that somebody could take with respect to their portfolio going forward.
Brian Pietrangelo [00:21:32] Well, thanks for the conversation today, George, Steve, and Rajeev. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So, reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.
Disclosures [00:22:06] We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, Key Private Bank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.
The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.
This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.
It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, Member FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.