Unadorned Notes: February 22-25, 2025
Fed Signals June Rate Cut; U.S. Growth Slows Amid Uncertainty; Market Leaders Underperform in 2025; House Passes Tax and Spending Cuts; Germany Seeks European Defense Independence
Economics, Finance, and Business
Fed Signals June Rate Cut: U.S. consumer confidence fell sharply in February 2025, with the Conference Board survey showing its steepest decline in 3.5 years amid concerns over President Donald Trump’s economic policies. Inflation expectations rose to 6%, the highest since May 2023, while the University of Michigan’s Consumer Sentiment Index dropped to a 15-month low. Interest-rate futures indicate a more than 70% probability that the Federal Reserve will lower its policy rate by 25 basis points in June 2025, with a potential second cut in September 2025. Policymakers remain cautious, citing uncertainty over tariffs, tax cuts, and immigration policy effects on inflation and growth. Despite a strong labor market, with unemployment at 4%, slowing business activity and weakening sentiment are increasing expectations for monetary easing.1
U.S. Growth Slows Amid Uncertainty: The U.S. Composite Flash PMI Output Index fell to 50.4 in February 2025, signaling a sharp deceleration in economic growth from a near-three-year high of 55.4 in December 2024. While manufacturing output accelerated, driven partly by preemptive sales ahead of tariff concerns, the service sector contracted for the first time in over two years due to policy uncertainty and adverse weather. Tariffs contributed to a two-year high in manufacturing price inflation, but overall inflation pressures eased as service sector pricing remained subdued. Despite this, firms reported rising input costs and reduced pricing power, pressuring profit margins. PMI-based indicators of S&P 500 earnings growth fell to their lowest level since December 2022, highlighting concerns over profitability.2
Treasury Warns of Fragile Economy: U.S. Treasury Secretary Scott Bessent stated that despite strong GDP growth and low unemployment, the U.S. economy remains fragile due to excessive government spending, regulatory burdens, and reliance on public-sector job growth. He emphasized the Trump administration’s goal of “re-privatizing” the economy through deregulation, tax cuts, and increased industrial capacity. Tariffs were highlighted as a key policy tool to boost domestic production, generate revenue, and counteract economic imbalances from countries like China. Bessent argued that fiscal reforms, including spending cuts and increased energy production, would help lower inflation and stabilize long-term interest rates.3
Treasury Yields Fall Amid Economic Uncertainty: U.S. Treasury yields declined for a fifth consecutive session, with the 10-year yield dropping to 4.297%, its lowest level since December 11, 2024, amid concerns over slowing economic growth. Investor sentiment weakened following data showing consumer confidence at an eight-month low and rising home prices, while uncertainty surrounding tariffs and government spending cuts added to market anxiety. Analysts noted that President Donald Trump’s economic policies, including tariffs and spending reductions, have heightened fears of a downturn without offsetting tax cuts or deregulation. Bond markets reflected these concerns, with falling yields signaling increased demand for safe-haven assets. A $70 billion Treasury auction of 5-year notes saw strong demand, further reinforcing expectations of economic uncertainty.4
Market Leaders Underperform in 2025: The GRANOLAS, Europe’s counterpart to the U.S. “Magnificent Seven”, significantly outperformed the market in prior years but have since delivered an average U.S. dollar-denominated return of just 1.9% over the past 12 months, compared to the Vanguard FTSE Europe ETF’s 12.3% gain. The underperformance of the Magnificent Seven in 2025, following their strong 2024 gains, underscores this trend, with only two of these stocks outperforming the S&P 500 amid valuation concerns and trade uncertainties. Investors are advised to be cautious of stocks that have risen to market leadership, as historical data suggests a high likelihood of future underperformance.5
Apple Announces $500 Billion U.S. Investment: Apple plans to invest over $500 billion in the U.S. over the next four years, focusing on manufacturing, artificial intelligence, and workforce development. As part of this initiative, it will open a 250,000-square-foot server manufacturing facility in Houston by 2026 and double its U.S. Advanced Manufacturing Fund to $10 billion. The company is expanding research and development, hiring 20,000 employees, and increasing its presence in silicon engineering, AI, and software development. A new Apple Manufacturing Academy in Detroit will support small- and medium-sized businesses in adopting advanced manufacturing and AI technologies. These investments build on Apple’s existing commitments, including supplier partnerships across all 50 states and continued expansion of data centers and chip production facilities.6
U.S. Politics, Policies, and Geopolitics
House Passes Tax and Spending Cuts: The U.S. House of Representatives passed a budget resolution by a 217-215 vote, proposing $4.5 trillion in tax cuts, $2 trillion in spending reductions, and increased military and border security funding over the next decade. The measure allows Republicans to begin the reconciliation process to extend tax cuts from 2017 without Democratic support. Critics, including the nonpartisan Committee for a Responsible Federal Budget, estimate the plan would add at least $2.8 trillion to the deficit by 2034. House Speaker Mike Johnson overcame internal opposition, though Representative Thomas Massie voted against the resolution, citing concerns over worsening deficits. The budget passage comes as Congress works to prevent a government shutdown before the March 14, 2025 deadline.7
Trump Fires Joint Chiefs Chairman: President Donald Trump dismissed Air Force Gen. CQ Brown Jr. as chairman of the Joint Chiefs of Staff, marking a significant shake-up in military leadership. Brown’s removal follows Defense Secretary Pete Hegseth’s push to eliminate senior officers perceived as supporting DEI initiatives, alongside the firings of Chief of Naval Operations Adm. Lisa Franchetti and Air Force Vice Chief of Staff Gen. Jim Slife. Trump nominated retired Air Force Lt. Gen. Dan Caine as Brown’s successor. Congressional Democrats criticized the firings as an effort to politicize the military, while Republican leaders expressed confidence in the administration’s selection process.8
Trump Orders Copper Tariff Probe: President Donald Trump directed Commerce Secretary Howard Lutnick to launch a national security investigation into U.S. copper imports under Section 232 of the Trade Expansion Act of 1962, potentially leading to new tariffs. The move aims to counter China’s influence in global copper production and bolster U.S. supply for electric vehicles, military hardware, and infrastructure. Top copper suppliers to the U.S., including Chile, Canada, and Mexico, could be significantly impacted by any new trade restrictions. The announcement followed a decline in consumer confidence and stock market losses, though U.S. copper producer Freeport-McMoRan saw its shares rise 5%. The administration also signaled plans to retaliate against digital services taxes imposed on U.S. technology firms, vowing to protect domestic industries from foreign trade policies.9
Trump Expands China Chip Restrictions: The Trump administration is intensifying efforts to curb China’s semiconductor industry by pressuring allies, including Japan and the Netherlands, to restrict maintenance of chip-making equipment in China. Officials are also considering new sanctions on Chinese firms, further limits on Nvidia chip exports, and tighter controls on AI-related semiconductor shipments. These measures build on Biden-era policies but reflect a more aggressive approach, including a potential ban on U.S. technology sales to Chinese memory chipmaker ChangXin Memory Technologies Inc. Discussions are ongoing about lowering the threshold for AI chip exports requiring a license, which could significantly impact global data center development. While these policies aim to hinder China’s technological and military advancements, their implementation depends on securing cooperation from key U.S. allies.10
U.S., Ukraine Agree on Minerals Deal: The United States and Ukraine have agreed on a framework granting Washington access to Ukrainian mineral resources, following negotiations led by Treasury Secretary Scott Bessent. The deal, part of President Donald Trump’s effort to recoup U.S. war aid, comes after Ukraine rejected an initial proposal demanding extensive resource access with minimal returns. Trump has framed the agreement as a transactional model for future U.S. foreign assistance, emphasizing that taxpayer funds should be repaid through economic concessions. While specific financial terms remain undisclosed, the agreement offers the U.S. better resource access than prior proposals while excluding an earlier demand for $500 billion in compensation. Ukrainian President Volodymyr Zelensky, who previously insisted on clear security guarantees, is expected to finalize the agreement during a visit to Washington.11
Germany Seeks European Defense Independence: Friedrich Merz, Germany’s chancellor-in-waiting, has called for greater European defense autonomy, citing concerns over U.S. commitment to NATO following remarks by President Donald Trump. He equated the geopolitical pressure from the U.S. and Russia, emphasizing the urgency of strengthening Europe’s security and exploring a potential nuclear umbrella with France and the UK. Germany, already the second-largest military aid donor to Ukraine, remains cautious about deploying troops but has not ruled out future involvement. Domestic security fears have grown, with voters prioritizing defense alongside economic and migration concerns, as Germany faces a weakened military and the potential withdrawal of U.S. forces. While Merz’s leadership signals a shift toward stronger European engagement, financial constraints and coalition negotiations may challenge the implementation of his vision.12
10-year Treasury yield ends at nearly 11-week low as economic concerns build | MarketWatch (msn.com)