June 4 – Stock futures turned modestly higher overnight, generally sustaining that strength through several key data releases this morning. The European Central Bank cut interest rates by 25 basis points this morning, after forecasting low inflation largely due to assumptions of lower energy prices and a stronger euro, with economic growth remaining sluggish. President Trump & President Xi also had the long-anticipated phone call. The VIX is trading near 17 this morning, while the dollar index is trading near 98.8. Yields on 10-year Treasuries are trading near 4.35%, while yields on 2-year Treasuries are trading near 3.87%. Crude oil prices are 1% higher – again probing close to overhead resistance near $64. Grain prices were supported as well, while soybean prices dipped.
First-time claims for unemployment benefits rose to 247K in the week ending May 31, up from 239K the previous week, and well above analyst expectations of 235K claims. That increased the four-week moving average to 235K, up from 230.5K the previous week. Continuing claims for the week ending May 24 slipped by 3K to 1.904 million, while the four-week moving average rose by 8K to 1.895 million. Initial claims for unemployment benefits filed by former Federal civilian employees totaled 538 in the week ending May 24, down 72 from the previous week. Continuing claims for former Federal civilian employees in the week ending May 17 rose by 341 to 6,719. On a related note, the Challenge Job-Cut report indicated that 93,816 corporate employees had been given notice of possible layoffs in May, down from 105,441 in April. The markets now look forward to tomorrow’s big job report for May to get a better idea of how the economy was responding to the tariff war following the volatility of April.
Nonfarm productivity fell at an annualized rate of 1.5% in the first quarter, which is worse than the 0.8% decline originally reported. As such, unit labor costs rose at an annual rate of 6.6% in the first quarter of this year, up from the 5.7% level originally reported. This indicates that wage inflation was stronger than originally believed in the first quarter of the year.
The cost of the Russia – Ukraine war continues to rise – both in human terms, as well as direct cost to their respective fiscal budgets. Ukraine’s stealth attack on Russia’s strategic airfields over the weekend is believed to have cost Russia $7 billion in lost and damaged equipment and infrastructure. That exceeds the $6.55 billion that Russia received in oil revenue in May. Keep in mind that the $6.55 billion in oil revenue received in May was down 35% from the same month in 2024, largely due to lower oil prices on the world market, and to the increasing effectiveness of U.S. sanctions that require Russia to keep lowering prices to attract buyers willing to risk those sanctions to buy it. The May revenue was down 53% from April as the Trump Administration steps up efforts to enforce those sanctions. January to May oil and gas revenues totaled 4.24 trillion rubles, down 14.4% on the year. And the losses are expected to continue to mount. As such, Russia’s finance ministry is revising its 2025 budget deficit upward to 1.7% of gross domestic product, up from the previously estimated 0.5%. President Putin seemed open to finding a way out of the current war prior to Chinese President Xi Jinping visiting Moscow earlier this year. Since then, he’s seemed content to step up the war, keeping U.S. and European military assets focused on the Black Sea Region, and not on the Indo-Pacific Region where China is increasingly active.
The world is still waiting for feedback from today’s highly anticipated call between President Trump and President Xi of China. Trump seemed to be setting the expectations low yesterday when he posted on social media, “I like President Xi of China, always have, and always will, but he is very tough and extremely hard to make a deal with!” In addition to setting low expectations ahead of the call, Trump was also likely sending a message of respect to President Xi. The Chinese culture values respect in relationships, which is why Trump always spoke well of Xi when the Phase One negotiations were occurring during Trump 1.0. The Chinese culture allows deals to be made with one’s opponents as long as there is a culture of respect present in relationship. That’s what allowed for the quick agreement to roll back tariffs for 90 days during the talks at Geneva Lake on May 11. That doesn’t mean that I expect a sweeping agreement to come out of today’s conversation, but it is a step in the right direction. I still believe that all of the signals point toward Xi trying to slow-walk the negotiating process, hoping that the myriad of court challenges against Trump will eventually remove President Trump’s ability to engage in the tariff war, so that Xi wouldn’t have to give up anything in negotiations. Nonetheless, China is paying a steep price for the trade war. Holiday spending during the recent three-day Dragon Boat Festival in China saw per capita spending on travel flat with the same holiday last year, and down by more than 13% from pre-Covid levels in 2019. This suggests that the consumer market is softening amid fears of a prolonged trade war that shuts down factory production. China is also facing the need to rollback production of electric vehicles as inventories back up, further threatening its economy.
