Tariffs, Tight Spreads, and Surprising Resilience: A Market Update

• Consumer discretionary weakness contrasts with resilient labor market and strong services data.

• Fed acknowledges tariff-related risks but maintains U.S. economic fundamentals are solid.

• Credit markets, including leveraged loans and junk bonds, show no signs of recession pricing.

Several companies in the consumer discretionary sector—particularly restaurants (Outback, Krispy Kreme, Applebee’s), hotels (Marriott, Hyatt, Wyndham), and footwear (Crocs)—have reduced or withdrawn 2025 guidance due to macroeconomic uncertainty. Many are already experiencing weaker same-store sales. Interestingly, there were exceptions: companies like Shark Ninja (consumer appliances), DoorDash (food delivery), and TripAdvisor (travel) showed resilience, likely driven by pre-buying or sector-specific tailwinds.

Overall, earnings and outlooks in consumer discretionary are weak—unsurprising given current conditions. What is surprising, however, is the continued strength in U.S. employment data. Initial and continuing jobless claims came in near consensus, showing no significant deterioration. Even more unexpected were the healthy services PMI figures: 51.6 vs. 50.2 consensus, well above my expectation of sub-50. Both new orders and employment components exceeded expectations. However, prices paid—an inflation proxy—jumped to 65 (vs. 61 consensus).

These strong services and labor data points are helping offset uncertainty tied to global trade and tariffs. Speaking of uncertainty, it was arguably Jerome Powell’s most-used word at this week’s press conference. He emphasized that while U.S. economic trends remain solid in growth, jobs, and inflation, trade policy poses a downside risk to the Fed’s dual mandate.

On the trade front, the U.S. and U.K. announced a tariff agreement, although details were sparse. For example, a UK airline buying Boeing aircraft could have happened anyway due to the duopoly. Markets, however, tend to look past specifics—they price in forward momentum and trust corporate management to navigate tariffs and supply chain shifts. Despite my desire for detailed mechanisms, I welcome this progress, even if it's only a first step.

Funding markets remain stable. Treasury auctions were well received, with strong domestic and foreign demand. The 10-year yield stands at 4.3%, slightly up on the week. Oil prices dipped earlier, reaching the high $50s/low $60s after OPEC+ announced production increases. The move is curious amid a global slowdown—perhaps aimed at making U.S. drilling less economical. Later in the week, oil prices recovered somewhat following the U.S.-U.K. trade announcement and ahead of the upcoming U.S.-China meeting in Switzerland.

In credit, leveraged loan bids have returned to pre-Liberation Day levels as CLOs ramp up amid favorable arbitrage and subdued new loan issuance. A few deals priced this week: a BB-rated deal tightened, while a consumer discretionary single-B LBO widened significantly to clear the market. Both syndicated and private credit markets remain active, with pricing and bids reflecting a no-recession backdrop. Junk bond spreads around ~340 bps further support this view—they’re far from recessionary levels.

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