Key Wealth Matters Podcasts

Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, June 6, 2025. I'm Brian Pietrangelo and welcome to the podcast.

In case you didn't remember, today is a very important anniversary going back all the way to the morning of June 6th, 1944, known as D-Day, when American troops and their Allied forces landed on the beaches of Normandy, France, in an invasion in order to help combat World War II in the overall Allies versus Axis. And as we know now, this is one of the most important landmarks in terms of ending World War II. And again, we thank all of our military veterans back then and now for their service to protect our country.

And on a much lighter note, today is also known as National Donut Day. I had my favorite this morning in celebration of Donut Day, which was a chocolate frosted donut. So I hope you have a favorite too and you get a chance to eat one this morning or later on today.

With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com slash Wealth Insights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series. In that, we address a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic activity, we've got four economic updates for you. First, we'll talk about the Fed's beige book report, and then second, we will talk about the three updates regarding the employment market and specifically dive into some of those details.

So first up, the Beige Book Report came out on Wednesday, which comes out in advance of the upcoming Federal Open Market Committee meeting on June 18th, and it comes out roughly two weeks in advance, eight times a year. The report covers the Fed's 12 districts across America and gives an update on economic activity in each of the 12 districts. As such, the report showed that out of the twelve districts, half or six of the districts reported slight to moderate declines in activity, three districts reported no change, and three districts reported slight growth. And not surprisingly, all of the districts reported elevated levels of economic and policy uncertainty which has led to hesitancy and a cautious approach to business and household

Turning to our three updates for the employment market, we begin earlier in the week with the job openings report from the Bureau of Labor Statistics, and for the month of April it came in at 7.4 million job openings, which was up slightly from the 7.2 million job openings in March. Also in that report, the number of quits didn't change that much, and the number layoffs and discharges didn't much either, so at least some stability there relative to job openings report.

Second, just yesterday, on Thursday, the initial weekly unemployment claims report came out showing an indicator of 247,000 new claims for the week ending May 31st. Now, this is a little bit more important these days because it's the second consecutive week of increases and the increase of over 8,000 where we've seen some smaller increases and decreases bounce around a bit for the last couple weeks. So again, we're looking at this number to see if it is an indicator that continues to rise week over week or we'll see some pullback as an indicator to the relative strength of the economy in terms of the labor market. And again, one of those key numbers that we watch there is whether this number gets above 300,000 as an indicator of whether we may or may not be headed for a recession on this particular data point.

And finally, just this morning on Friday at 8.30, we came out and saw the employment situation report, again from the Bureau of Labor Statistics, which gives us two key indicators. The first is the new non-farm payroll report, which came in at 139,000 for the month of May, which was actually a decent number and slightly bigger and better than expectations in terms of the overall new nonfarm payrolls added. However, if we look back to the revisions for the prior two months for both March and April combined, it was a minus 95,000 in revisions to those two job numbers. So net-net decent, but we've still got to take into consideration that that was a hit to the overall numbers. Also part of that report, the unemployment rate overall stayed low at 4.2 percent. So as we often do as we turn to our panel for the open discussion on what the market and the economy had for us this particular week, we will start with George to get his take on the economy and much much more. George?

George Mateyo [00:05:15] Well, Brian, I think the biggest economic news this week, of course, came this morning, Friday the 6th of June. And as you mentioned, the employment report was a pretty decent report. I think there were some points of softness to it. And overall, the labor market, I think, is softening, but not falling apart, which is certainly welcome news and probably one reason why things like risk assets are doing fairly well at the open here on Friday. I think if we kind of glean through some of the numbers and parts of the details, there's a little bit of kind of good news, bad news, in the sense the good news was the number was a bit better than expected for last month, but then the prior months were revised pretty significantly lower, and we've continued to see, anecdotally anyway, some evidence that maybe layoffs are kind of rising a little bit among certain companies and corporations, but that said, I mean, we have to kind of take into account that April and May were probably the peak months for uncertainty. And one report that doesn't get as much fanfare, which, you know, probably deservedly so in the sense it's more of a secondarily beneficial report, which is what they call the job openings report. And frankly, it was kind of surprising to see the numbers for April actually tick higher for the first time in a while.

So in terms of putting that into context, you know, it was a month where tariffs were at the highest probably level of history, the recent history anyway. And yet at the same time, it seemed like many companies were actually creating more jobs and essentially putting more openings out there for people to take advantage of. And I think that again is still somewhat beneficial, but I think we're going to have to still kind of wade our way through the summer and see if there's any last impact from tariffs and other things that have been already implemented thus far. I think the other news this week, I think it was kind of interesting on the geopolitical side that it appears anyway, it appears that maybe some thawing again is happening between the U.S. and China. It's been kind of an on again, off again, Xi said, Xi said kind of, I guess, tit for tat discussions of the late, but I think it was positive nonetheless that both sides came up just the other day or so and said that talks are ongoing and talking is better than not talking. So we'll kind of take that at good news.

We also closed the month of May when we got together last week and it was kind of interesting. The month of May Steve anyways, a pretty strong month for the equity market. The old adage, I guess, sell in May and go away, I guess, didn't really come to fruition in the sense that the equity market was up some 6% or so in May. And thus far, it seems like the momentum is carrying forward into June. So Steve, as you think about what's happened, we've seen some interesting rotation amongst some of the Mag 7 stocks. We want to talk about those on these calls. Any things you're gleaming with respect to what's happening in the broader equity market or the Mag 7 stocks more specifically?

Stephen Hoedt [00:07:55] So a couple of things caught my attention this week, George. First, to your point on seasonality, sell in May and go away really is a, well, it sounds nice. That's not really the way the market works. If you look at seasonality. The period of time from May through July is actually, it's either second or third in terms of the best seasonal periods of the year. So if you sell out in May, you miss a pretty good run in the market, historically speaking. Now, the real part of seasonality that is interesting is that the market does tend to peak in the summer, but it doesn't peak in May, it peaks in the third week of July, which coincides with typically the end of uh, the end of Q2 earnings reporting season, and then we have trouble through October. So, so really the, the mantra should be sell, sell, is selling late July and buy again in October, not selling May and go away. And it doesn't sound, it doesn't sound as, you know, pithy and, and then sing-songy, but that's the way the market typically works.

So you know, we think that, you know, when you look at the setup that we have right now, we've got some momentum coming back into this market. We had a number of different breadth indicators signify really good things over the last month. And we've seen interesting rotation under the hood of the market where things like the defensive sectors, which led earlier this year during the market sell-off, health care, consumer staples, REITs, those things have started to underperform. And most interesting to us, Industrials has been leadership on this most recent rally, along with the Mag 7 names. So it's kind of a two-pronged rally being led by industrial cyclicality and tech, and to us, that's fairly healthy. Under the hood in the Mag 7, obviously, there's a lot of divergence. You've got a couple of the names and things like Microsoft and Nvidia doing pretty well, and you've got others like Tesla and Apple, which are having problems for their own reasons. Apple due to the tariffs and Tesla due to, well, you could call it the Trump and Elon situation. Let's just call it that. I don't know what else to say. I think earlier, George, did you call it The Big Beautiful Breakup? Something like that.

George Mateyo [00:10:44] That's right, maybe it’s a blow up, I don't know, to break up. Break down, I don’t know.

Stephen Hoedt [00:10:50] Whatever, whatever it is. Somebody's having a breakdown, but at the end of the day, it's really, it's kind of weighed on Tesla stock. So, you know, that within the context of the mag seven has been a laggard, but overall tech has been has been leadership over the last month to month and a half on this rally. And to us, you now when we put that all together, it's, it kind of looks like the market wants to make a run at new highs as we head into this into this mid-summer period. And then we'll see how things go, but I think we're likely going to have a new high here in the not too distant future, George, from my seat.

George Mateyo [00:11:32] I think the other piece of news that came out this morning in the jobs report, Rajeev, was the fact that wages actually ticked higher. That's probably good news for consumer spending in the sense that everybody likes to have a few more dollars in their pocket. As history has shown, once consumers have discretionary income, they're prone to spend it. That bodes well, but at the same time, that probably makes the Federal Reserve less likely to do anything with interest rates in the near term. What are you seeing this morning with respect to futures prices, for interest rates, and what's your thought about the Fed going forward?

Rajeev Sharma [00:12:02] Well, you make a very good point there, George. I mean, that non-farm payroll's print that came out, you saw the immediate reaction of the bond market. Traders immediately trimmed their bets on Fed rate cuts for the rest of the year. And now the market expectations are that they're pricing in less than 50 basis points of easing through the end of 2025. The market now really believes that the Fed will stay on pause through the summer. All those summer FOMC meetings are pretty much pegged to be pause. No rate cuts. And the odds of a September 25 basis point rate cutter hovering around 75% post the NFP print was being fully priced by the market is just one 25 base-point rate reduction for the year.

And it's quite a change from where we started the year where the market is expecting four to five rate cuts this year. You've seen other central banks go through with great cuts, but the Fed has really remained on this wait and see approach. Not just because of the data, it's also the uncertainty of a fiscal policy. There's a lot of factors that the Fed is kind of trying to weigh and I think it's making their job pretty difficult. The last thing the Fed wants to do is do a policy error by cutting too quickly and then having to reverse course. We saw those kind of policy errors in the ‘70s. We don't want to see that again.

I know the Fed has really been very careful in their approach to rate cuts and the immediate impact of this recalibration by the market now as far as rate cut expectations go can be seen on the yield curve. Right after that NFP print, we saw short yields rise sharply and it's kind of the market's easing their concern about the labor market. The two-year treasury yield moved higher by five basis points, got to four percent. The 2's 10's curve is flattening. The 10-year treasure note yield moved up by seven basis points and once again is inching towards that 4.5% point on the 10 year. We saw yields on the 10-year go as low as 4.31% just this week, and that was a new low for the month. And now we're seeing a complete reversal. The employment data signals ongoing resilience and hiring. But even as the 10 year approach is 4.5%, we have yet to see buyers start to step in. And I don't think the buyers are going to step into today at 4.5%.

What's really going to dictate the tone of the market through the summer is going to be this debate on fiscal deficits. The economic outlook will be front and center. Generally, what we've seen in the past, the unemployment rates and fiscal deficits, you know, used to really track each other quite closely, but not anymore. The gap between government borrowing and the unemployment rate is pretty large now. And that could put pressure on bond yields in the near term. Add to that, we have treasury coupon supply that's gonna be back-end loaded coming up next week. So with increased long end supply, you can expect long end yields to stay pretty firm. Investors will make room for these treasury options next week, so they're not rushing in to buy today. I think they're going to just see how this plays out next week before the Treasury options.

Now, the next Fed meeting is in two weeks, and that's where we're gonna see where the Fed members' thinking is at regarding rate cuts and their projections on the economy. But if you hear the Fed narrative that we've heard over the last week, there remains no rush to cut rates. It's this wait and see approach that's live and well, and then I think that's gonna continue with Fed members. Next week starts the blackout period for Fed speakers, so they won't be able to talk much, and we won't hear from them. And that might actually be a good thing for the markets. Might keep some calm in the markets right now.

And speaking of calm, if you look at credit markets, they've remained extremely calm, extremely resilient. Investment grade spreads, they remain in a tight range. In fact, where investment grade spreads are right now, we're just about seven basis points away from a 21 year tight. And that's pretty significant considering in early April, there was a lot of fears in the market that we're gonna see this credit blowout and we see spread start to widen significantly. All of that's been reversed. Even high yield spreads have narrowed about seven base points this week. Again, if you look at high yield credit spreads, they are showing zero signs of an economic downturn. So I would just say right now, the risk on trade remains in credit. Corporate borrowers are coming to market with new issuances. There's this big supply demand technical. So you're seeing a lot of demand for high quality investment grade paper. These deals are getting done at very attractive levels for the corporate issuer, but also satisfying the demand that we're seeing from investors out there for corporate credit.

Brian Pietrangelo [00:16:26] Hey, Rajeev, what are you seeing with other central banks across the globe as compared to the Fed?

Rajeev Sharma [00:16:31] You're seeing other central banks, they've already started cutting rates. They've been doing this for a while and you're seen them get towards the end of their rate cutting cycle. And what's happening there, I mean, if you look at Europe, they pretty much came out and said that we've gotten to our point in inflation where we feel comfortable that we may not have to do any more rate cuts after this. That was the takeaway from the recent European central banks rate cut and narrative. And I think what they've done is they've done a pretty good job managing their rate cut expectations. You saw yields start to drop throughout the rate cutting cycle for Europe. You're going to start seeing those yields start to move a little higher now as we ended the rate cutting cycle. We're getting towards the end of their rate cutting cycle. You used to always see the US move first. The Fed used to cut rates before the other central banks around the globe. That's not been the case this time. The U.S. has really been cautious, if you will, they've been very cautious on cutting rates. I think other central banks have gone through with rate cuts, and I think that's caused some of the angst from the White House that we should be seeing more rate cuts to fuel the economy.

But I don't think the Fed right now is in any mood to really follow other central banks. They're sticking with their narrative. Inflation is not coming down to their 2% target. There's uncertainty as far as fiscal policy goes. And I think right now the Fed's really going to have to really. Be very careful, especially in their next FOMC meeting, when they have their press conference, Fed Chair Powell's really gonna have to walk a tight line to not hint at when the first rate cut will be, but probably have to give a lot of details as far as where the Fed's thinking is when it comes to fiscal policy, these tariffs, what happens after the 90-day pause. Until we see something that goes into law, I don't think the Fed is gonna be in any mood to start guessing at what the future of tariff policy or fiscal policy will be.

Brian Pietrangelo [00:18:24] Great, thanks Rajeev. George, any final thoughts for investors as we have this little communication breakdown between a couple of people that just are good reminders for our audience out there?

George Mateyo [00:18:34] Well, as we haven't say, you know, you really, you only have to really worry about what's important and what you can control. And you can’t control the news, obviously, but you can how you react to it and how you respond to it. And I think that's probably one thing that in this, in this day that's more relevant than ever. And I think for us, it's going to be this moment where being diversified is going to matter a lot. So you don't want to have all your eggs in one basket, as they say, and diversification has helped. So if you're concentrated in a particular stock that might be in the crosshairs, it's probably good to diversify around that position as we see things going forward. We continue to think this is going be a risk on, risk off sideways market for a while. I think it's important to be patient, be diversified, and really think about what you own and why you own it.

Brian Pietrangelo [00:19:21] Well, thank you for the conversation today, George, Steve, and Rajeev. We appreciate your perspectives. In addition, thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

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Brian Pietrangelo [00:00:00] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to open doors in the world of investing. Today is Friday, May 30th, 2025. I'm Brian Pietrangelo and welcome to the podcast. And thanks for joining us today.

We were off last week, as you may recall, in observance of the Memorial Day weekend, So we appreciate you rejoining. And just as a final note, we had a fantastic celebration of observation of the Memorial Day in my hometown with a guest speaker from the former military, really quite moving. And again, we always remind people to observe the day for the reason for the day, which is to remember those that gave the ultimate sacrifice for our country as freedom is not free.

In addition, this is the time of the year where we congratulate many of the graduates from both high school and college as you continue to move forward in your endeavors in your life and in your career. Congratulations and good luck to all of you.

With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Rajeev Sharma, Head of Fixed Income, and Sean Poe, Director of Multi-Strategy Research. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, we've got three economic releases for you and we will start first with the initial weekly unemployment claims report that came out just yesterday, for the week ending May 24th, and the number was 240,000, which was a little bit above average tick-up from the prior week at the level of 14,000 increase from the prior week. We've seen this before, but again, we've had stable initial unemployment claims for roughly the last 15 to 18 months, so as this number continues to remain normal, we'll look to next week to see if it comes back or it's a trend in the upward direction and we'll give you more news at that time, whether this is favorable or unfavorable.

And second, as we look to GDP, we get the second estimate for the first quarter of 2025, which was somewhat favorable in that the first estimate was a negative 0.3% for the quarter. The second estimate that we just received yesterday was minus 0.2% for the quarter. Again, minus 0.2%, so an uptick of 0.1%. The revision increase was reflective of actual overall consumer spending that went down, but was offset by investment increases. So net-net, just a 0.1% increase in the right direction.

And third, the report that came out just this morning regarding PCE or personal consumption expenditures inflation came in for April roughly at the estimated value of 2.5% year over year. Again, this is consistent with expectations and shows continued declines and although it remains in a slow grind, it's the second month in a row of lower results yet still remains well above the Fed's target of 2%. Goods inflation continues to be deflationary in spite of current and impending tariffs, but services inflation remains higher than desired. So we'll continue to watch this in terms of the dual mandate with respect to the Fed's policy on maximum employment and price stability.

And speaking of the Fed, we also got the minutes from the Federal Open Market Committee meeting back in May that we will talk with Rajeev on to see if there's any interesting news there after the fact. But other than that, it sounds like it's probably a no-issue. With that, let's turn to George to get his reaction to some of this news on inflation. But in addition to that, as we always have George give us a commentary on trade and tariff policy, what's the up-to-date news that we've encountered this particular week, and furthermore, get a little bit of an update on thoughts on tax policy. With that...

George Mateyo [00:04:09] Well, Brian, I'll just kind of kick off by kind of summarizing some of the key economic data points that you already referenced, but just for, I guess, sake of context, we've kind of talked a while now that we would thought we'd be seeing some read-through in the economic data from what we've seen thus far from the administration around tariffs and trade policies and so forth, and we'll talk more about that in a second, but right now, at least it doesn't seem like that's having any meaningful effect.

The inflation report that came out earlier this morning here on Friday around 10 a.m. Eastern suggested that inflation really barely budged. I mean, there really wasn't much to talk about. Actually, we saw the lowest reading on a one level inflation this year. So inflation seems to be somewhat moderating or maybe in check. Not withstanding some pressures maybe later this.

And at the same time, the other news of the week, of course, that we watch pretty closely is jobless claims. Those seem to be somewhat moving a little higher, but not to the worst level. Although, as we said before, there are some small little cracks in the data that we have to pay attention to, which suggests that things are slowing, but certainly not collapsing. I guess that would be my quick summary.

Since you acknowledged, Brian, that last we regrouped was about two weeks ago, we've had a lot of news since then. Of course, from the trade front, we started this week, this last weekend, I guess, I can say, thinking that we'd see higher tariffs imposed on our European trading partners. And that's a pretty big deal, because, you know, notwithstanding our trade agreements between Mexico and Canada, European, the EU comes a close third in terms of the overall impact in terms of trade between our two regions, if you will.

And so when we saw that headline kind of crossed over Friday, of course, markets didn't take it too well. It was kind of a bit of a sloppy trading session a week ago. But then nonetheless, Trump quickly changed his mind and kind of reverses course a few days later. And we saw a market responding kind and had a pretty good start to this week. And then ever since then, it's been kind of a volatile trading session one after the other. And we got more evidence of that just in the last few days or so, with respect to more tariff news suggesting that maybe these tariffs might actually be paused or put in hold.

We saw one court actually come out and say that the terrorists actually don't have any legal standing, which I think is a pretty big deal. So they effectively blocked the administration's tariffs. But then just a few hours later, an appeals court allowed those tariffs to be reinstated. And now that seems to be headed to a Supreme Court that will probably be kind of coming up with some decision perhaps later today, making these comments somewhat irrelevant.

But I think the bigger takeaway for our listeners is to acknowledge the fact that this trade war is not over. Many people I think have kind of put money to work thinking that the overall trade news is behind us. I still think it's still in front of us and there's still a lot of uncertainty. And the fact that trade policy is shifting around so much between one moment and the next, it just to me that investors need to be pretty careful and pretty disciplined with respect to their portfolios. And not making any big moves at the same time. The fact that there's a lot of headline news that happens instantaneously. So I think our overall view is that the trade war is not over and really being diversified and disciplined is gonna be very important.

You know, at the same time, Rajeev, when we started thinking about, I guess, the news of the last few weeks or so, of course, we have to acknowledge the fact that the House of Representatives passed a pretty significant bill that suggested maybe there's going to be some additional spending, there's probably going to be more issuance of Treasuries and so forth. And of course we saw a backup in yields in response to that. Now, by no means is that over in the sense we still have to hear the Senate side. Of course, the Commerce Committee has to come together and formulate maybe what might be one overall package. But nonetheless, the bond market seemed to initially kind of take that news as bad news, suggesting that rates might actually be higher on a longer term basis. But would you take away from that what your thoughts on what's happening in the bond market since then, and how are we thinking about risk in the corporate sector, particularly?

Jon Poe [00:07:51] Well, George, the U.S. Right now, I feel they're under two lines of stress. One, as you mentioned, is tariff policy resulting trade wars. The other is the government's annual deficit, which at one point nine trillion is not really sustainable. And the proposed tax policy, which has provisions in it and a price tag on it that could be over two point six trillion in borrowing again would lead to higher deficits and would make a recession even more expensive to manage. During recessions, deficits generally go up. The federal government would need to borrow, especially when local and state governments cannot.

And we saw those fears start to hit the bond market back in April when we started talking about tax policy and we started to talk about the impact of that policy on deficits. We also saw the downgrade of the U.S. Sovereign debt. That also moved bond yields higher, put upward pressure on interest rates, and also hampers the Fed's monetary policy. The current federal deficit has never been this large outside of a recession. And that impact, I think, was really felt on the long end of the yield curve. We saw 30-year Treasuries pushing past 5% yields only then to retreat when buyers finally started to step in. But you don't see those types of moves on the 30-year part of the curve. And the 30-year part of the curves is really showing the fears of what a tax policy could do to federal deficit, what this additional spending could do to the deficit, and what would be really the result of trade wars, how much money would really come in to kind of alleviate some of those stresses.

Bond markets are currently trading, in my opinion, on momentum. We had that benign PCE consumption and inflation data. That's not really gonna do much to change the monetary policy story. Tariff uncertainty is still in the picture. And now, as you mentioned, George, the legality of tariffs is in question. You have a Fed that's really unable to make a clear decision on monetary policy as long as there's all these uncertainties out there. And so the Fed remains in a holding pattern, and currently, the market is expecting two rate cuts by the end of the year, with just a little bit over 50% odds that the first rate cut would come sometime at the September FOMC meeting.

In June, however, we will have the Fed's release of the summary of economic projections and the latest projections from the Fed on rate cuts. The big question is going to be, are they going to stick to their projections of two rate cut for 2025, or will they be more cautious and bring that down to one rate cut for 2025? Got some indication of that with the release of the May FOMC meeting minutes. If you go through those minutes, there weren't a lot of surprises, but there are a few things that I think were noteworthy. Again, the Fed reiterated its cautious approach because of all this economic uncertainty out there. And they pointed to a Fed that is now saying that the flexible average inflation targeting has diminished benefits when inflation is high. So they are really looking inflation. I think inflation was the big focus the meeting minutes. And what was interesting was some Fed officials did point out that the loss of the safe haven status could have long lasting implications for the United States. So all of these thoughts are in the Fed's mind right now. And I think there's no clear path for the Fed. The narrative out of the Fed has again, been this wait and see approach.

And you did have that Chair Powell and Trump meeting this week. They had a meeting that was initiated by President Trump, who has been pressuring the Fed to cut rates. He's been pretty vocal about it. And pretty much the gist of the meeting was that, I think President Trump wanted to meet with the Fed Chair Powell and talk about why we're not cutting rates already. And Powell pretty much stuck to his guns and said monetary decisions would have to be careful, objective, and non-political. So the key takeaway is the Fed's gonna still be data dependent and is not gonna really try to do anything preemptive to try to cut rates. Not just did not look political but also because there's just not enough certainty out there for the Fed to make a decision to get in there and save the day, cut rates and all of a sudden have a policy error and have to raise rates after that just to backtrack. I don't think the Fed wants to have any kind of policy error. And so they will continue with this wait and see approach.

What the markets are doing, they're keeping this momentum trade. The 10-year Treasury bond yield is currently below 4.5%, well below the peak that we've seen this year. Despite inflation risk and the slower pace of rate cuts that are now being expected. One would expect that the tariff picture would become a little more clear in the second half of the year. But any negative surprises on the economy or on earnings, they would likely hurt equities a lot more than bonds. If you look at Treasury yields, right now, if you even price out rate cuts, long-term investors are ready to lock in any kind of yields where they can get something over 5%. And if they can do that, they're limiting their downside risks. So you do see those investors step in when they see that magical 5% number on yield. And you're going to continue to see that

Credit spreads on the other side, they continue to grind tighter. It points to a risk on trade, but we've been strong advocates for corporate credit for several quarters, now over two years, we've been talking about how important having corporate credit in your portfolios is, and specifically high quality names. These are those blue chip companies that have strong balance sheets that can withstand any potential downturn in the economy. So right now I think that the market's really trying to anticipate what the next move's gonna be by the Fed. Maybe we'll get some pointers from the June meeting, but right now, I think it's a wait and see approach by the Fed. I think right now the market is kind of in this momentum phase where yields continue to drift lower and below some of those key target levels for the 10-year, that would be four and a half percent. For the 30-year, that would 5%.

George Mateyo [00:13:34] Rajeev, you're right to mention the fact that the overall treasury situation can be somewhat fraught if we're not careful here in terms of the overall borrowing that needs to happen if these tax bills get pushed forward. And one thing that's kind of interesting from my perspective is the fact, that some of the large institutions, large non-profit institutions particular, seem to be in the crosshairs. So in other words, as we think about how the administration is proposing paying for some of these favors, these tax cuts and so forth, one thing that they've focused on more recently has been focusing on higher education. And of course, one institution particularly has got a lot of attention, but I won't spend time talking about that. But more broadly, I've read something more recently that suggests that the tax on endowments might rise from roughly 2% to over 20%. And that's a pretty significant jump. And of course, these large endowments, large universities have large endowments and with inside their endowments, they have a large amount of private equity. So maybe I'll turn it over to you, Sean, to get your thoughts on what's happening inside the private equity landscape these days and maybe some opportunities for our investors to consider given what's happening at the broader level of endowment finance.

Sean Poe [00:14:40] Thanks, George. Before we get into why the endowments are divesting and what it means for investors, first a quick refresher on private equity.

So, what is private equity? In its simplest form, private equity is ownership in any company that's not publicly listed on a stock exchange. So while public stocks like Apple and Nvidia generate a lot of headlines, it's important to remember that private companies make up a large portion of the economy. To put some data to it, 85% of companies in the U.S. with revenue greater than1$00 million are private companies. And if you only invest in publicly traded stocks, you wouldn't have the exposure to this segment of the economy. So, the first reason that private equity can be interesting in a portfolio is diversification. It's simply the opportunity to own a broader part of the market. And given the volatility of public markets so far this year, investors may appreciate this diversification even more.

The second, and to be honest, the primary reason that Private Equities of Interest is simply the potential for higher returns. Over the long term, private equity has generated roughly 500 basis points of annualized outperformance, meaning roughly 13% returns versus 8% for public markets. This outperformance has pretty logical underpinnings when you look under the hood. Private equity investors have long-term control over their underlying companies, which unlocks the ability to create value through initiatives like operating management, building new revenue streams, reducing costs, which, of course, as an owner of Apple or Nvidia stock you would not have the ability to do.

So what's happening today in the private equity market that makes it especially interesting? As George alluded to, there have been headlines about sophisticated investors like Yale and Harvard selling out a portion of their private equity holdings to secondaries funds. This dynamic's been largely driven by the looming threat of increased taxes on endowments, which means that they will need liquidity in their portfolio to make tax payments and distributions.

Secondaries are a specific version of private equity. And I'll explain what they are. Their main role in the market is to provide liquidity by buying private equity interests on the secondary market, which often comes at some sort of discount, given that the sellers are forced in some way. If you go back 20 or 30 years, this was a total cottage industry. Secondary funds were typically buying just zombie interests from old PE funds. But more recently, as distributions from private equity have slowed and the markets evolved, secondaries have turned into an important strategic lever for both buyers and sellers. In 2024, the secondaries market reached $162 billion in volume, which was up 45% from the prior year. And projections for the secondaries volume in 2025 are to approach $200 billion, which would equate to another 20-25% growth.

So as an investor, how should I think about the opportunity in secondaries? Well, first to understand secondaries better, you might want to think about housing. Typical private equity investments, if you think of a classic buyout investment, are kind of like buying a new build house. You wait for the construction, the landscaping, the neighborhood to develop before you realize your full value. Secondaries are more like buying an existing home. The house is already built, the yard's mature, the neighborhood is already developed. In this way, you already know what you're buying, you make the investment much more certain, and the timeline to being able to resell the house for full value is much shorter. To put a finer point on this, secondary funds often hold underlying investments for two to five years, whereas buyout funds are pushed to five, six, even seven years.

So what should investors consider when thinking about investing in secondaries? So first, many of the traditional elements of private equity are still true. These interests are both complex and illiquid. Investors should expect to be locked into an investment in a secondaries fund with no opportunity to exit until the fund realizes all underlying investments. Additionally, secondaries also experience a notable reporting lag. As an investor, you may not see finalized quarterly values for up to six months after a quarter ends. Now on the flip side, when used properly, secondaries can add a unique element to a portfolio. They offer significant diversification with exposure to a large number of underlying holdings across different industries and different vintages, the years in which the investments were made. Also, as you might infer from the example of Yale and Harvard, sellers are often forced in some way, which often results in buying at somewhat discounted prices. When you roll this up, secondaries can provide the opportunity for diverse exposure at attractive prices with a shorter timeline to realization relative to a traditional private equity fund. These dynamics, in combination with the Yale and Harvard headlines mentioned earlier, have driven secondaries from a cottage industry to representing almost one third of all private equity transaction value.

Brian Pietrangelo [00:19:26] Well, thanks for the conversation today, George, Rajeev, and Seann. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Disclosures [00:20:02] We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, Key Private Bank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.

The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.

This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.

It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, Member FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.

Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to open doors in the world of investing. Today is Friday, May 16th, 2025. I'm Brian Pietrangelo and welcome to the podcast.

And before we begin today's podcast, I would like to take a pause and reflect that ten days from now will be May 26, and that will be Memorial Day. As a result, we will not have next week's podcast on Friday as an observation of that, going into the Memorial Day weekend and then Memorial Day on May 26th.

As a result, I would like to pause today to mention that we ought to have a reflection on overall Memorial Day, the reason for Memorial Day. Certainly for those who died in service, serving their country from a military perspective. And it's our opportunity to honor and reflect them. The first observance of Memorial Day actually occurred back on May 30th of 1868, and was proclaimed by Commander-in-Chief John Logan of the Grand Army of the Republic in honor of the Union soldiers who had died in the American Civil War. We all know that this carries fairly forward for all the wars that we have been in within the United States, including World War I, World War II, certainly Vietnam, Korean War, and a whole bunch of other things including Desert Storm, and all the other conflicts that we have. So even though we are excited for hot dogs and apple pie and the beginning of summer, so to speak, when Memorial Day rolls around every year, I think it is even more important that we take time to pause and reflect and honor those who have died and given the ultimate sacrifice to defend our country because freedom is not free. And again, take a moment of silence. Even though Veterans Day is the observation of those that are currently serving, it's always nice to remind those of you that know somebody in the military today when Memorial Day rolls around to also thank them for their service. Obviously even though they haven't passed away, but is obviously put together in one big fell swoop in terms of how we honor our military.

With that, I would like to introduce our panel of investing experts today, here to share their insights on this week's market activity and more: George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, we've got three key economic releases for you this week, first beginning with the major report for the week, which was the consumer price index measure of inflation. Month over month, for the month of April both all items in core inflation excluding food and energy came in at a 0.2% growth rate for the month of April. Which was fairly decent, but still not going significantly lower as we continue to talk about inflation being stagnant, but again, it is still good news going in the right direction. Similarly, the year-over-year numbers for April of ‘25 showed all items going up 2.3%, which was slightly lower than March, and core was up 2.8%, which was the same as March. We will talk with our panel today what this means relative to having inflation before tariffs and having inflation with the potential implication of tariffs as we go forward with the news coming out of Washington.

Second, retail sales on the Advance Monthly Sales report for April of 2020-25 came in at only a 0.1%, which was fairly low, but that was after a robust March which came in at a  +1.7% for month over month So, again, we talk about this advanced buying with respect to the potential tariffs being levied. So, March was a fairly robust month. We did anticipate there might be a pullback coming in April to equalize some of that advanced buying and it seems like we do at least preliminarily see that at up only 0.1%.

And finally, or third, the industrial production for the manufacturing side of the economy came in for the month of April at flat. Which is up 0.0% which was slightly good news because it had come off the heels of March which was a decline of 0.3%. So we're headed again in the right direction as this number does tend to jump around month to month. But overall, that's a fairly decent report at even being flat for the month of April.

So with that, let's turn to George to get his reaction on some of the economic data, and also, what we've been usually doing on a week-to-week basis is get an update on some tariffs, which was the big news also beginning Monday of this week, when we got some preliminary data on a U.S.-China agreement on tariffs and the potential reduction of the tariffs that were proposed by President Trump back on April 2^nd, so we will look at that. George, what are your thoughts?

George Mateyo [00:05:18] So Brian, I think the big news of the week, as you mentioned, really focused on the tariff situation. The economic data itself, I think, was probably okay overall. I mean, there were some puts and takes, as you mentioned. And I think that in some extent, you know, we haven't really seen the full impact of tariffs show up in the data. And that doesn't mean that tariffs won't impact the economy, it just means that tariffs haven't impacted the data yet. And as we said before in some of these conversations in other places, too: there'll probably be a time where the data does get a little bit worrisome and maybe a little bit soft or ugly or whatever description you want to put on it. But I do think that there's probably still some more implications for the economy based on the fact that tariffs really haven't impacted the data yet, as I just said.

So that said, I think the tariff news that really kind of kind of catalyzed this market, of course, was late Sunday, early Monday, when it seemed as if there was a pretty big shift in tone, both from the Chinese and also from our government around tariffs on each other. And that resulted in a significant risk on rally, and we've seen the markets respond favorably to that in the last few days. So it's a significant swing in sentiment and departure and a shift from where we were just a few weeks ago. And that's certainly welcome news. I still think there's some uncertainty about really what happens in 90 days. So we've essentially been on kind of pause now. And it's probably on one level, not necessarily a good thing in the sense it doesn’t know exactly how we end that, but it is good that people are talking. So when people are talking that usually leads to better outcomes, hopefully over the long run. And the announcements this week was also pretty constructive in the since that both parties, both the Chinese and both here in America, both stakeholders were actually kind of saying the same thing. We've seen similar situations when the stakeholders actually say contrasting things and that just leads to more confusion obviously, but it seemed like both parties were pretty aligned trying to get something done. And I think that's why the markets kind of took solace in that outcome.

But it's also curious to me that the economic data that's come out this week. You know, again, it's probably too early to say exactly what direction we're leaning, but it does seem that for now, inflation is kind of creeping up a little bit. The labor market is softening a little bit, so we have to keep our eyes open and be vigilant to those things as well. Also this morning the consumer sentiment numbers were really quite weak, and that's kind of interesting in the sense that we've seen ongoing now just the soft data continue to get softer, meaning survey data gets weaker, and it suggests that there's more concerns about the economy. But at the same time, consumers are still spending, and we've seen kind of a general steady state with respect to sales activity. Again, it did weaken a little bit in the past month, but it didn't really collapse at all. And then on the corporate side, where there's also some survey, data suggests that corporations, mainly treasurers and CFO and business leaders and board members. You know, those folks are also pretty pessimistic. Some of the data that suggests the overall sentiment around corporate activity is also pretty bleak.

But yet at the same time, Steve, we've actually seen M&A pick up and there were at least two big deals that I saw this week been announced that to me suggested corporations are feeling pretty good about themselves despite the fact that there's some headwinds to navigate. So as you think about this and now we've just kind of wrapped up early season, what's your takeaway with respect to corporations? How they actually kind of manage this volatility and what that really kind of bodes well for the market going forward.

Stephen Hoedt [00:08:29] So George, I think that the corporation's part of this and it comes down to one piece, and Rajeev can probably comment on this too, but it really jumped out to me this week that we had BB versus BBB credit spreads reach a new five-year low. Now ponder on that for a second, because literally less than a month ago, we saw high yield credit spreads blowing out relative to investment grade. And now we're at new five-year lows. So that tells me that the credit markets are open. And in that kind of an environment, if you're looking to do a transaction, I think you're taking advantage of it. So I mean, I really think the spread move there to me has been really the big piece of news this week. That bodes well for equities over the near to intermediate term as well, because if credit is at new all-time lows, that suggests that equities have the potential to move to all- time highs. Now, I'm not making the call for that. I don't think that's our base case here, but it was kind of an eye-opener for me this week.

When I think about how earnings have played out, you know, this is going to be an interesting question as we move through the balance of the year, because to your point, I don't think that the tariff news and that kind of stuff is fully reflected in what has been going on with earnings. Earnings are a little bit lower than they were a month or so ago, but the multiple that people are willing to pay for it has exploded back up to 21.5 times, which again, we're back toward the top end of the trading range there.

And when I look at some measures of sentiment, such as put call ratios and things like this, it tells me that sentiment has started to get frothy again. So, you know, I think where we're at here is that the rebound has been sharp. There's been a change in news flow from bad to less bad. And I think people anticipate that the news from here likely is more positive incrementally than negative. And so you've got that as a potential tailwind as we head into the summer. But at the same time, if we do start to see earnings numbers tick down and the fact that the multiples are as high as they are with sentiment frothy again, it suggests to me that maybe near term, you know, we've got some consolidation is more likely than just a rip to new all-time highs.

George Mateyo [00:11:09] So let's stick with the theme for a second, Rajeev, and kick it over to you. Can you give us your take on it? Obviously when corporations are spending money like they're spending - and Steve and I both reference that - that's healthy for the equity market, but bond markets might not take that as comforting in the sense that corporations are probably taking more debt on the balance sheet at the same time, too. So how do you balance that? How do you read through the economy? What are the economic read throughs in terms of those activities from your perspective?

Rajeev Sharma [00:11:36] Steve's point that he made about the credit markets. I mean, I think the risk on trade is alive and well with the credit markets. To Steve's point, investment grade spreads - they tightened about three basis points this week. High yield credits spread are tighter by about seven basis points this week.

You saw a bunch of corporate issuances come out this week. New deals are being priced. Once again, very little concessions on these new deals. They're coming in really tight to where secondary bonds are trading. And the reason they can do that is because there's this huge demand for corporate paper, especially high-quality paper. And we've been big advocates of high-quality securities for quite a while now. We feel that those are the names that you can get decent yields on. And they're also able to withstand any downturns in the economy. So there's this big push from corporate treasurers to come out there with new deals. They waited for the CPI print to come out this week and as soon as that print was done you saw a big wave of corporate issuance and I think we're going to continue to see that. Generally summer months are are a little more quiet for corporate issuance, but for the last couple of years we haven't seen any slowdown in corporate issuance in the summer either. So there's this huge supply-demand technical that's out there, there's just not enough supply out there to satisfy investor demand for corporate paper, especially as I mentioned, high-quality paper.

We did see some other things in the market this week. We did see bond yields rise during the week and they hit some key resistance points. A lot of this had to do with this heavy supply of mortgage-backed securities that hit the market. That did take the 10-year Treasury Note yield to above 4.5% midweek. Flows remain pretty moderate in Treasuries, but those MBS deals they totaled about three billion dollars and they came out on Tuesday with further follow through on Wednesday. So this issuance was not being met with any real demand. Nobody's really bulking up on their MBS exposure right now, but it did see an impact to Treasuries.

The benchmark for mortgage rates is the 10-year Treasury bond. And that's where we saw a rise in the 10-year during the week. And that resistance point that I'm talking about on the 10-year is 4.5%. And the resistance point on the 30-year treasury note is 5%. Both of those were met pretty quickly this week. But then a lot of this got reversed as we started beginning Friday trading. Treasuries seem to have an oversold status and then you saw buyers step in that were waiting on the sidelines for a good entry point, and they found that good entry point. So after touching those highs, these are the highest levels that we saw in yields in over a month. On Thursday, we're seeing those retreat now. Tens and Thirties have all come down. The 10-year is now trading on 4.39%. The 30-year’s trading at 4.86%. So again, we've retreated from those resistance points. We could see yields continue to fall in the coming days. You have banks and money managers putting money to work. Specifically in the twos, fives, and ten-year space, you have no shortage of headline risk related to tariffs, tax policy and geopolitics. But, you had that softer than expected PPI data that helped yields move lower.

The recent bond rally is getting support from two press releases that came out this week as well. And these were in relation to the regulation-exempt Treasuries from the supplementary leverage ratio, which is SLR. Now the SLR is a ratio of banks tier one capital to their total leverage exposure. And right now, Treasuries are not excluded from that denominator. So they currently lower banks SLRs through discouraging Treasury ownership by banks. So there was this Thursday SIFMA released a statement urging regulators to exempt treasuries from that ratio. And so banks could buy more treasuries. So you saw that impact on the Treasuries as well. You saw Treasury yields start to drop lower during the week.

At the same time, the House Committee on Financial Service has also released a statement on the importance of highly liquid treasury markets. And I think that's also something that's been adding a lot of support to the treasury market in providing this bond rally that we're seeing in the late part of this week. And then you also had Treasury Secretary Scott Bessent emphasizing SLR reform.

So all of that being combined, we also heard from Fed Chair Powell this week as well. He spoke at a research conference this week and he discussed Fed policy and the framework, and how it needs to be reviewed. He pretty much said that the U.S. economy will face even more supply shocks in the near term. And monetary policy is becoming increasingly challenging to monitor and to handle right now with the way the economy is progressing. He reiterated the need for inflation to meet the Fed's 2% target. But it almost seemed like he was giving a little bit of flex there about that 2% target. I think that there's a lot of theories out there that will he change the goalpost, is 2% still the target? He didn't really go as far as committing to that, but he did say that we're not going to enter a near-zero interest rate regime again. And I think that's going to be very important. It almost seemed like Powell's a little more focused on employment shortfalls at the time being.

So it's been an interesting week. I think we're gonna continue to see Treasury yields be range bound. There's a lot of soft economic data that's coming out next week, so that shouldn't really push yields higher. So we could be in this range for quite a bit at this point.

George Mateyo [00:16:41] That's a great overview of the corporate market and some of the interplay with the Fed. But I'm kind of curious to know, Rajeev, your thoughts on debt issuance, the amount of issuances on the corporate sector? What are your thoughts or what are you sharing with respect to the federal sector, the government around tax cuts. You know, if we have a big tax package, you know, that probably means we have to borrow more as a country. We obviously have the debt ceiling that's kind of looming out there. I think Treasury Secretary Bessent was on the tape last week this time saying that, you know, we've got enough money to get through until August. And then we're going to have this discussion, which we always seem to have every two years around the debt ceiling. But what do you hear in respect to any concerns from investors on Treasuries themselves as it's kind of a reserve currency and the reserve investment of choice.

Rajeev Sharma [00:17:30] There's been a lot of headline risk. I totally agree with you, George, about kicking the can down the road. It seems like we do that every few months as far as the debt ceiling talks go. We do have this tax reform package that Trump's bringing to the table. There are some concerns whether that can actually get done or not. Obviously, it's going to cost. The debt, the federal deficit will definitely increase with that tax package, but it would spur the economy if they could get that through. I do feel that there is a lot of concern right now about the debt situation in the U.S. What's interesting to me though is you're not seeing foreign participants, you know, shying away from the Treasury market. As long as that support is still there and it's almost 30% of the Treasury market right now. As long as we have that support from foreign investors, I think that Treasuries should not blow out too far from where we are right now. That being said, I do think that the tax package and tax policy are going to be extremely important. Another factor for the Fed to think about as well. And when we think about the growth in this country. But everybody knows that it's not sustainable, the debt levels that we have in this country. And I think that unless we get some kind of reform. It's going to make things very sticky as far as how we continue as an economy.

George Mateyo [00:18:44] So I would just close by saying I think that's an important thing to watch as we get to the summer and you know, we've talked a lot about diversification and diversification is something that frankly didn't work very well in 2023 and 2024. When you had a really concentrated rally, meaning that most investors benefited from a rising - call it seven or eight stocks in the S&P 500 - and not much else. And this year we've seen the inverse of that. We've seen markets broaden out. We've actually seen greater up performance from international markets. And if there is a concern that Rajeev talked about with respect to our sovereignty and really kind of the solvency of the U.S., which I think is probably a bridge too far to think that's a risk. But I think we have to be mindful of the fact that people really should be diversified as much as possible in this environment, knowing the outcomes are pretty extreme and pretty wide ranging. And as we said before, because of the impact of tariffs really haven't been felt, I think it's important to really take stock of your and can be diversified as possible as we go through the next few months.

Brian Pietrangelo [00:19:38] Well, thanks for the conversation today, George, Stephen, and Rajeev. We appreciate your insights and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information.

And we'll catch up with you in two weeks. Again, taking a pause next Friday on the 23rd for the observance of Memorial Day. So we'll see how the world and the markets have changed two weeks from now and provide those keys to help you navigate your financial journey.

Disclosures [00:20:19] We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, Key Private Bank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.

The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.

This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.

It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, Member FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.+

Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, May 9th, 2025. I'm Brian Pietrangelo and welcome to the podcast.

I was on the road this past week and had the opportunity to meet with a lot of clients in the Buffalo and Rochester, New York areas. Really great to meet a lot of new people and an engaging conversation. I want to thank the market leaders in, respectively, Buffalo with Tim Pelcher for Key Private Client and Kevin Schunck for Rochester, also for Key Private Client, for hosting those events. What a great opportunity. In addition, I wanted say thanks to our Key Private Bank market leader in Rochester, Vince Lecce for hosting a very special event yesterday on Thursday. What a great opportunity. So if you're listening in from any of those markets and you have any questions or need more information, please reach out to those three individuals and they can certainly try to help you.

With that, I would like to introduce our panel of investing experts, here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director Of Fixed Income Portfolio Management. As a reminder, a lot of great content is available on key.com/wealthinsights including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, the economic calendar was fairly light, so we only have two updates for you, but we also have two updates on other topics for you during today's podcast. So the first update on economic news was that weekly initial unemployment claims for the week ending May 3rd came in at 228,000. Now we share this with you because last week's increase was a little bit larger than the average, but this week's decrease was about the same as the increase last week. So the reversion back to a more normal number tells us that the unemployment claims continue to remain very stable, at least at this time, that's good for the employment market.

Second, the ISM report on the services industry showed that the services sector had expanded for the 10th consecutive month in April and effectively for the last five years. Actually good expansion in the services economy. So good news there as we continue to see what the differences are between the manufacturing economy which has been weak and the services' economy which has been strong.

Now the two other topics that we're going to discuss on the podcast today certainly the Federal Open Market Committee meeting that occurred on Wednesday of this week and we're gonna get a recap and dive into what that means for the future. And in addition to that we are going to talk a little bit about tariff policy as we go into the weekend with a little bit of the news from President Trump and also the meeting with Scott Bessent with China over in Switzerland. So with that, let's go right to Cindy to get the recap on the Federal Open Market Committee this week.

Cynthia Honcharenko [00:03:17] Thanks, Brian. The Fed announced that it would maintain the federal funds rate at its current target range of four and a quarter percent to four and half percent. They cited ongoing economic uncertainties, particularly those arising from the recent trade policies. The decision to keep rates steady reflects the Fed's cautious approach amid uncertainties related to the economic impact of the recent tariff implementations. And while the economy continues to expand at a somewhat solid pace, the Fed acknowledged that risk to both inflation and employment increased. The labor market remains strong, but the full effects of trade policies are still unfolding. They emphasize the data-dependent approach, indicating that future policy adjustments will be based on incoming economic data and the evolving outlook.

So what does this mean for the Fed's future policy stance? I think there's four things here to look at. Slower path to rate cuts. Powell warned that new tariffs could delay inflation progress and rate cuts up to a year. So even though the Fed had previously projected two cuts by the end of 2025, the trajectory is now less assured. Policy easing will likely be pushed back unless inflation data improves convincingly for them.

Second, rising risk of policy dilemma. Powell acknowledged the possibility of simultaneously higher inflation and rising unemployment, which he called a very difficult scenario for the Fed. This highlights the risk of entering a stagflation-like environment, which could force the Fed to prioritize inflation at the expense of growth or vice versa, depending on which of the risks dominates.

Third, data-dependent, not calendar-driven. Powell reiterated a data-dependent approach, not a timeline-driven one. Investors should not expect pre-committed rate cuts. Instead, the Fed will likely respond to monthly inflation and labor data with the flexibility to pause longer or pivot more quickly depending on the direction of risk.

And finally, policy bias is still toward easing, but with less conviction. The Fed's clearly not considering further rate hikes and the balance sheet runoff reduction is a dovish signal. The Fed next move is still expected to be a cut, but now with greater conditionality. Markets will remain volatile as expectations adjust with each data release.

And what does this mean for investors? I think the bottom line is the Fed stance remains one of cautious optionality. Powell's messaging suggests the bar for rate cuts has risen. In the short term due to inflation concerns from tariffs. While recession risks are not yet acute enough to force any action, investors should remain attentive to the upcoming economic reports and Fed communications for further insights and potential policy shifts. George, Rajeev, what are your takeaways from this week's Fed's meeting at Powell's presser?

George Mateyo [00:06:25] Well, Cindy, I think you nailed it. I think there's just a lot of uncertainty out there. I can't remember a time where the Fed has just been kind of conditioned to do nothing. And unless, of course, the economy is kind of in a steady state, which it really is, but nonetheless, it struck me that this wait and see approach they've opted to take is probably appropriate in the short term, but I think more in the medium term, it has some risk to it. And you pointed out rightly so that they're in a position where they're waiting to see how things play out with respect to inflation and growth.

And my guess is that they might be too late to act. In other words, we might start to see growth split before they act. And that's a little bit different from what we've seen in past crises. Not to say this is a crisis yet, but I think we have to acknowledge the fact that there's just so much uncertainty that we would probably see the Fed act only if there's a significant deterioration in the labor market. And right now there isn't, thankfully so. So more specifically, we saw the the jobless pay numbers that we talked about on these calls come in this week. The fact that they actually kind of think down a little bit from the prior week is probably again further validation for the Fed that they don't have to rush into anything, take any bold moves right now. That's further support for what we saw last week at this time when we talked about the job numbers that came up for the prior month better than expected. So for right now the labor market is holding on and holding in, and that suggests the Fed can hold on too.

Next week, I think, of course, we'll have to turn our heads, as you pointed out, Cindy, to talk about inflation. Some numbers come out I think the middle part of next week, and as you also noted, there are several Fed speakers that are on the diet this week and I think next week too that will probably share some more of their insights and probably further clarify some other policies. But those are things that I would probably point out. Rajeev, as you think about what this might mean for your portfolios, what were your takeaways from the Fed meeting and how do you think we should be positioned going forward?

Rajeev Sharma [00:08:17] I think the Fed is in a situation where they really can't say anything right now. They don't know what fiscal policies are going to be, they don't what the trade and the tariffs are going be. And I think what's going to happen right now is the Fed is not going to make a policy error. A lot of people felt that the Fed was going to preemptive, maybe cut rates sooner than later. But based on the press conference, I don't think the Fed is in any shape to be thinking about being preemptive.

And the problem with that is the market expects them to do something before the tariff situation gets resolved. And we haven't seen a Fed that's willing to do something before any information comes out. And the most important thing is the Fed has always made policy errors in the past. They've thought about inflation being transitory. This statement that they came out with, they said that inflation is not as transitory as they said in the last March statement. So I think the Fed is really thinking about inflation right now, they're thinking about the jobs number right now. This has caused a reduction in the amount of rate cuts that we're thinking about for this year. Up to the Fed statement, there was about three rate cuts pretty much expected for this year. Now we're leaning towards two. Which is pretty much what the Fed had said in their last summary of economic predictions. So it's going to be very interesting to see what the fed narrative is gonna be with the Fed speakers this week. But it's been risk on as far as corporate bonds go, corporate credit spreads have come in. And I really think that the Fed has a big opportunity right now to talk about their narrative. If they try to think about wait and see for longer, I don't think the markets can like that.

Brian Pietrangelo [00:10:18] So for our listeners out there, I'm going to timestamp everything that Rajiv, George, and Cindy said together. So four Fed meetings in the first half of the year, four Fed meetings in second half of year. And if you link the tariff policy and the pause that Trump announced back on April 9th, that's a 90 day pause. So April 9th, May 9^th, June 9^th, July 9th. So the Fed's really hamstrung to act any time before July 9 and the next meeting after July 9th is on July 30th is right after that. For past the first three months in terms of the June meeting being the last one on June 18th before that 90 days comes up. So very interesting to see that it's hard for the Fed to act when they don't have certainty around tariffs. And we'll get forward to the second half of the year, but very interesting. Thanks for the commentary. George, anything else?

George Mateyo [00:11:04] Well, on the tariff side, Brian, I think there was some news this week, of course, around tariffs and what was announced between the United States and the United Kingdom. And I think we can kind of say this is a deal. This is the first deal of substance in a way that people can point to and maybe kind of glean some takeaways in terms of where trade policy is going to be headed. I want a caveat that was saying it really isn't a deal yet in the sense that it's not going to die, at least as of this morning, the Friday morning, around 10:15 a.m. Eastern Time.

But I think it's a framework, so it's not a deal. And I guess the way it was kind of put together sounds a bit kind of hasty in my view, based on some of the press release and some of that commentary that's come out since then. But those topics aside, what did take place is that it suggested to me that there's gonna be still this 10% tariff on most goods coming from the United Kingdom. And to some extent, to kind of put that in perspective, coming into “Liberation Day,” the overall tariff rate in the U.S. Was somewhere between two and three percent. And of course it quickly escalated and people now thought that maybe at that point, that 10% would be the worst case. Now people are saying that 10% is the best case. So we've kind of had to reframe our thinking around this in a short matter of time. But, and I think we've kinda talked about this in previous conversations.

This is not disastrous news, but it's not good news either. So this is still kind of some bad news and still some headwind for many consumers and also companies alike. But nonetheless, you know, we are kind of moving our way forward in this process. I think this is going to be a key weekend on the trade policy discussions. I think they're just discussions, though. I don't think we would really expect to see anything substantive come out of the conversations between the U.S. and China this weekend. But nonetheless it is going to be this it's kind of on again, off again environment, which is going to be just forced, just going to kind of continued war and certainty that we have to navigate our way through.

At the same time, there's probably some uncertainty at the corporate sector and Steve, we've kind of now made our way through earnings season just about, I think we're almost complete with that, with earnings season for Q1. Are there any takeaways from your perspective that we should think about from the equities market perspective, noting that we're now a couple of points above pre “Liberation Day” levels, and it seems like the market's kind of dragging off some weakness at the corporate level and also in the tariff sector. So what's your takeaway from the equity perspective?

Stephen Hoedt [00:13:19] Yeah. So George, I mean, it really comes down to the idea that once we got past quote unquote “Liberation Day” from a news flow perspective from the market, things have been less bad, right? So almost anything that has come out from a new perspective has either given clarity to the situation that has been evolving or been less bad than the market has expected. And that was all it took to get things to improve.

As we sit here this morning, we're less than a half a percent below the 200-day moving average on the S&P 500. The NASDAQ-100, which is the tech focused index, actually cleared its 200-day yesterday. And you look at some things from the market internals, we've seen continued improvement. We're into what I would call a technically overbought situation, which means we've pushed a little bit too far than we should over a short period of time to the upside. And things may consolidate here.

But at the end of the day, as long as you're in a situation where the news flow is going to continue to be positive relative to expectations, that sets up a situation where you want to buy pullbacks in the market. And I think that the upside bias is going to continue. It would take another shock of some kind of negative proportions to derail the market here. And that's not something that we see. And in fact, I think you could argue that we're at the point where you may see the news flow out of D.C. pivot toward kind of the growth and deregulation argument as opposed to being focused on tariffs.

And that bodes well for our forecast, which we've been telling people since late last year, which was, you know, a kind of a volatile slash down first half of the year and an improving second half of year, that that has pretty much played out to a T as we sit here today. And I think that that's likely going to continue.

George Mateyo [00:15:29] On the tax side of things, I think you're right. We have been talking about that might be somewhat of a, a catalyst for some continued momentum, Steve, but I'm hearing things that suggest that the Republicans are actually kind of moving farther apart from one another than they're coming together in terms of, you know, what's included in this new bill that they've been talking about any thoughts on just overall tax policy that we're starting to kind of think about.

Stephen Hoedt [00:15:52] I try not to get too inside baseball on that stuff, George, but, you know, I think that. They need to show that they can govern and they will come up with something at the last possible moment to show they can. That's my less than sophisticated political analysis of the situation. We'll get some kind of a deal at some point this summer most likely or maybe in the fall. Who knows what it will look like. There'll be lots of back and forth between now and then for sure.

George Mateyo [00:16:28] Maybe I'll take you back to the markets then, since that's probably more you're bailiwick, but any thoughts on some of the headline news this week from some major tech companies to Magnus and Seven, anything you want to comment there with respect to just broader stock market trends?

Stephen Hoedt [00:16:40] So what I will say is that, you know, when you look at, at Apple and Google, the news, they were in the news this week with the antitrust hearings for Google leading to some comments coming out of Apple that regarding AI. Look, I think that everybody knows that AI is a game changer of various sorts. I think people still question what's the killer app for AI. I don't think that we have a really good answer for that yet. But it is clear that it's disruptive and it's here to stay.

So, you know, the fact that business models, traditional business models such as the ad focused business model from Google, So the fact that those are going to come under attack and have to be adjusted, it shouldn't be a surprise to anyone. I think that the numbers that we hear thrown about kind of are the thing that maybe shocked investors a little bit this week. But I think this week was more, I don't know that I would call it a sea change more than I would say that it's kind of a validation of some of the idea that AI is changing the way that the current world has been configured and the winners and losers in the future may look different. And the interesting thing about the Mag 7 is, what this maybe causes you to do is, are the Mag 7 really that magnificent if their business models can potentially be disrupted by these new technologies. Maybe there'll be a new Mag seven years from now, George.

George Mateyo [00:18:22] There likely will, Steve, there likely will.

Brian Pietrangelo [00:18:24] Well thanks for the conversation today George, Steve, Rajeev and Cindy. We appreciate your perspectives. And before we close the podcast for today I'd like to have a wish to all of the mothers this weekend for a Happy Mother's Day. Thanks to all the mothers, grandmothers, stepmothers and everyone else helping to raise our families and societies. What a great appreciation. Again, Happy Mother’s Day to all the mothers out there.

And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

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