June 17, 2025

QuickTakes

"UNCONDITONAL SURRENDER"

The stock market held up remarkably well today considering that President Donald Trump abruptly left the Group of Seven meeting in the Canadian Rockies this morning. On his way home, he warned Tehran's residents to get out of town immediately. He also warned Iranian leader Ayatollah Ali Khamenei that he is an "easy target" and "our patience is wearing thin." In a subsequent post, he then demanded "UNCONDITIONAL SURRENDER" by Iran. His comments today suggest that the US might enter the war against Iran by dropping bunker-busting bombs on the country's nuclear facilities. The S&P 500 Aerospace & Defense stock price index is soaring in record-high territory (chart).

Under the circumstances, the participants of the Federal Open Market Committee (FOMC) have lots to discuss during their two-day policy meeting that ends tomorrow. What's not on the table is a rate cut anytime soon, in our opinion. That leaves Fed watchers focused on how Fed Chair Jerome Powell spins the range of views following the FOMC meeting at his presser tomorrow afternoon.

Fed watchers also will be focusing on the committee's latest Summary of Economic Projections (SEP). Odds are that its median economic forecasts will show slow economic growth with a slight increase in the unemployment rate and a modest short-term uptick in inflation--all mostly consequences of President Donald Trump's tariffs and now the war between Israel and Iran. The SEP is likely to signal a couple of small cuts in the federal funds rate in coming months. But Powell will certainly reiterate that the FOMC is in no hurry to do so.

Let’s review the highlights of today's economic releases:

(1) Retail sales. The 0.9% m/m drop in May retail sales is the biggest so far in 2025 and the first back-to-back monthly decline since the end of 2023. It was largely driven by soft auto sales (chart). A good argument can be made that tariff front-running in April, when auto sales surged, siphoned off sales from May’s tally.

The control-group measure of retail sales rose 0.4% m/m as apparel, furniture, and sporting goods posted gains (chart). Consumers, backed by a solid jobs market, are still spending on discretionary items. An argument can be made that May's headline weakness could reverse itself in June.

(2) Atlanta Fed GDPNow. Reflecting the drop in overall retail sales, the Atlanta Fed’s GDPNow forecast for Q2's real GDP growth rate was lowered from 3.8% to 3.5% (saar) (chart). This would still more than erase the 0.2% (saar) contraction in Q1.

(3) Manufacturing steady. May was hardly a barn-burner month for US factory output. But given the tariff chaos of the last few months, the 0.1% m/m increase in manufacturing production rise matters (chart). Interestingly, output of motor vehicles and parts was up strongly last month. Utility output was the major drag on overall industrial production.

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