While our narrative below acknowledges the Fed's latest messaging -- not only no rate cut in the offing, but, per fed funds futures odds, one hike fully priced later this year -- we see probabilities leaning against a rate hike between now and year end... Although, as implied below, we will continue to test our thesis and remain openminded to the possibility as we go.
At the same time, we actually believe that the perceived posture is on-balance warranted, based on our view of longer-term inflation reality... So it's not economic weakness that we necessarily see staying the Fed's hand, it's, frankly, our view of what the ultimate gameplan will be under its new leadership going forward.
I.e., make no mistake, higher short-term interest rates, amid a massive amount of government debt to roll over this year and next, alongside a historic federal budget deficit, is, well...... let's just say that a higher short-end (where the treasury will no doubt concentrate its debt issuance going forward) is not the least bit desirable from that angle.
So, inflation gets to run hotter (oh, but recall, new leadership is considering other -- friendlier -- inflation gauges to base future rate decisions on) without Fed intervention, which will ultimately steepen the yield curve (long-end rising, while short-end stays anchored)... Which is a scenario that bigly favors the banks (which we've been adding to this year), as long as higher long-end rates don't ultimately stifle the economy.
I'll circle back tomorrow with some market-specific video commentary.
In the meantime, here's this week's scoring of our lately-improving PWA Index, followed by our weekend macro roundup*:
The Gauge Just Turned Positive — Here's What That Does and Doesn't Mean*
After remaining negative for nearly 3 months, our internal conditions gauge crossed into positive territory this week. It's a genuine milestone after a notable stretch below the line, and it's worth pausing on — both for what it's telling us and, just as importantly, for what it isn't.
What improved
The improvement was real, and it came from the part of the economy that touches households most directly. May data showed consumers still spending, with incomes rising a touch faster than spending — enough to let the savings rate tick up from the very low levels it had fallen to. Business investment intentions, once you look past a noisy headline driven by aircraft orders, actually firmed. And the broad run of economic data came in ahead of what forecasters expected, by the widest margin in months. After a spring dominated by anxiety, the hard numbers held up better than the mood music suggested they would.
That's the surface, and the surface got better.
What didn't
Underneath, the inflation picture didn't improve — it firmed. The Federal Reserve's preferred inflation measure accelerated in May to its fastest annual pace in over three years, with the core reading — the one that strips out food and energy to show the underlying trend — climbing to its highest since late 2023. So the same week the activity data brightened, the inflation data quietly got more stubborn.
There's a fascinating tension running underneath all of this. The financial markets that price future inflation have rolled over hard, betting that the recent energy relief — oil has now fallen all the way back to where it sat before this spring's conflict — will pull inflation lower from here. The actual, realized inflation data is saying the opposite, at least so far. One of those two will be proven right over the coming months, and the answer matters enormously. Our working view, grounded in the fiscal and structural backdrop we've written about before, is that inflation proves stickier than the market's optimism implies. We'd rather be positioned for that and pleasantly surprised than the reverse.
How we read the Fed
The central bank's posture sharpened this week. Under its new Chair, the Fed removed an expected rate cut from this year's outlook, raised its own inflation projections, and adopted unusually firm language committing to restoring price stability. Markets responded by pricing in a meaningful chance of an interest-rate increase before year-end — a notable shift from the rate-cut narrative that prevailed earlier in the year. This is a Fed signaling resolve on inflation, not one preparing to ease. That's a different environment than many investors were positioned for, and it's one we've been anticipating.
What it means for how we're invested
A positive turn in the conditions gauge is welcome, and we don't want to talk past good news. But the distinction we keep returning to applies here precisely: the improvement is cyclical — it lives on the surface, where the month-to-month economic pulse plays out. The forces we build the portfolios around are structural, and they didn't change this week. If anything, the sticky inflation reading and the firmer Fed reinforced them.
So the posture holds. The real-asset and inflation-aware tilts in the portfolios aren't a hedge against some remote risk — they're a direct response to the base case as we see it, with enough internal balance and deliberately contrasting exposures to ride out the swings that any given week will keep producing. We also note, quietly, that beneath a stock market trading near record highs, the more defensive corners have been quietly reasserting leadership — a reminder that the surface and the substance don't always agree, and that it pays to watch both.
None of this calls for dramatic action. It calls for staying anchored while the cyclical noise plays out, and keeping our eye on the structural story that actually drives long-term outcomes. The gauge turning positive is a real and welcome data point. It is one data point, and we're holding it in the context of everything underneath it.
This note is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. Past performance is no guarantee of future results.
*Prepared by Marty Mazorra, Chief Investment Officer, Private Wealth Advisors. Research synthesis and drafting assisted by AI tools under advisor review. All market views, analysis, and recommendations are those of the advisor.
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