KBRA Financial Intelligence

3 Things in Credit: Data Vacuum, Sand in the Gears, and Consumer Angst

Listen to Van Hesser's insights on: Spotify | Apple | YouTube Music

Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

So, we talked last week about how volatility was settling down, as investors got more comfortable with possible policy outcomes. Well, it seems that CEOs are expressing similar relief—that, according to the latest CEO Confidence Index survey of 277 U.S. CEOs, conducted by Chief Executive magazine June 3 and 4. CEOs’ assessment of current business conditions rose for the second consecutive month, to 5.3 out of 10 on a scale where 1 is poor and 10 is excellent. The middling degree in optimism is reflected in other questions, namely, “Do you expect profit to grow over the next 12 months?” Some 54% said yes, while 46% expect profits to be flat to down. Or, “How do you rate consumer demand for your product or service compared to last year?” Respondents in the “Higher” camp came in at 34%, while 32% said “Lower.” While better, I don’t think we’ve exited “Camp Uncertainty” just yet.

This week, our 3 Things are:

1. Data vacuum. Be patient—the meaningful reset is coming.

2. Sand in the gears. While we wait for data, here’s what is forecast.

3. Consumer angst. The Fed’s latest survey reflects growing concern among the less advantaged part of our Two Economies.

Alright, let’s dig a bit deeper.

Data vacuum.

Amid the euphoria of the ongoing rally in risk, investors seem to have forgotten that we are in the midst of significant developments in markets, namely, shifts in U.S. trade, fiscal, and monetary policy. But it seems as though investors have decided that what will ultimately result will not be all that material. Jamie Dimon warns that’s complacency. We would agree. The impacts of what’s in motion are not yet known. We are in a data vacuum.

Let’s start with trade policy. One, the tariff regime is fluid, to say the least. But we believe the administration’s revenue goals, needed to pay for tax cuts, will likely keep a 10% universal tariff in place for the foreseeable future. In addition, we expect a myriad of additional levies on certain countries and certain industries. Add it all up and we see an effective tariff rate of around 15%. That is, of course, up from 2.5% at year-end 2024.

The impact of this is yet to be defined. No surprise that we’ve seen very little effect thus far. And in light of the fact that intermediate goods represent some 50% of imported goods, it will take some time for the final price impact to hit. Figure July, August, September as the period where that impact becomes better known. So, we’ll have to wait until Q3 earnings for a more complete view of all of this.

In terms of fiscal policy, just how stimulative the One Big Beautiful Bill will be is yet to be determined. As is just how inflationary the bill will be. And we don’t know just how contentious the negotiations will be, which means we don’t have a good sense as to the risk of market disruption stemming from possible government shutdown. We do expect some form of the bill to be passed, especially an extension of the TCJA. All we know is that this process will generate plenty of headlines over the course of the summer.

And with regard to monetary policy, safe to say the Fed will be on hold until we see growth truly crack and inflation cool. We don’t see that as being a possibility until Q4 at the earliest. That means rates will remain restrictive for a while.

Add up all three, and you have a meaningful headwind to growth that we believe is not fully factored into current risk valuations.

Alright, on to our second Thing—Sand in the gears.

Consistent with our messaging on the previous Thing, it is worth taking stock of growth forecasts, such that they are, for full-year 2025. Yes, the tariff effects are still unfolding, but we do seem to be moving toward de-escalation. And that is likely to keep the world and its major economic regions from falling into recession in 2025.

Starting with the world, the consensus estimate, courtesy of Bloomberg, is for growth of 2.6% in 2025. That’s down from 3.3% in 2024. If we take out the COVID year (2020), that would be the lowest level since the GFC. Sub-3% levels are typically the outcome when the U.S. is in recession. For what it’s worth, the World Bank’s forecast is 2.3% and the IMF’s 2.8%.

For the U.S., growth is expected to halve in 2025 to 1.4% from 2.8%. Only three of Bloomberg’s 77 responders pencil in growth of 2% or more in 2025. Getting to 1.4% means Q1’s weakness and Q2’s expected strength, driven by behavioral shifts related to tariff positioning, should offset, followed by slower-than-potential growth in the second half. Our own forecast sits at 1%. The halo effect of U.S. exceptionalism is fading as the world reacts to the administration’s policy initiatives, and the large and growing U.S. deficit.

In the eurozone, while relatively weak growth is expected to continue, the consensus expects only a modest downdraft in 2025. That’s 0.8% GDP growth down from 0.9% achieved in 2024. But the story is stabilizing, as inflation settles in around target, and a new wave of fiscal stimulus and maybe even some deregulation flow into activity.

And finally, in China, the consensus is expecting slowdown from 5% in 2024 to 4.5% in 2025. Importantly, however, more constructive trade talks between the U.S. and China seem to be emerging, which will come as a relief to both economies. We do expect China to continue to lean toward stimulus via rate cuts and targeted support for certain industries, as it confronts overcapacity and deflation.

Alright, on to our third Thing—Consumer angst.

By now, we’ve all been conditioned to view the soft data a bit skeptically. Yes, the University of Michigan Index of Consumer Sentiment plunged during the pandemic period, yet consumer spending held up reasonably well. After bouncing in 2023 as inflation came under control, sentiment readings have been sliding again since 2024 and once again sit near the survey’s 48-year low. This time, it seems to be dragging consumer spending down with it. The hard data is showing deceleration, although the true magnitude of the slowdown is up for debate. Bank of America believes “that much of the [recent] decline in spending can be attributed to falling gasoline prices and some payback for tariff-related buying ahead activity that occurred earlier this year.” That may be true, but we believe headwinds facing the consumer are rising.

The latest Survey of Consumer Expectations from the New York Fed, out this week, reflects similar—if less dramatic—sentiment seen in the Michigan survey. According to the Fed, one in three households expect to be financially worse off a year from now, a level we saw at the height of the inflation scare in 2022, but one that is running about double what is typically seen in less volatile times. The reading is consistent with rising expectations of not being able to make minimum debt payments and increased difficulty in accessing credit, both of which are evident in the most recent Fed survey. No surprise, reduced job security is also beginning to show up in the survey, despite the low unemployment rate. Expectations of higher unemployment a year from now has jumped in the survey and remains elevated.

We see investor concern building in many consumer sectors. Since the April lows in the stock market, underperforming sectors—those that have not participated fully in the rebound—include consumer staples and retailers, which are experiencing trade down behavior and concerns about the impact of tariffs. In addition, casual dining restaurants—those that predominantly serve middle- and lower-income households—have underperformed, as you would expect given the trends in the Fed survey. Now, to be clear, disproportionate consumer spending comes from the wealthier household cohort. But the impact of economic slowdown on those less wealthy households will continue to lean on the aggregate data.

So, there you have it, 3 Things in Credit:

1. Data vacuum. The impacts of tariffs and the Big Beautiful Bill have yet to be defined.

2. Sand in the gears. The downdraft in growth does not square up with current risk valuations.

3. Consumer angst. The Fed’s latest survey reflects growing concern about the strength of consumer spending.

As always, thanks for joining. Next week we will be out of the office telling our story. We’ll see you in a couple of weeks.