The ongoing impact of tariffs and a mixed bag of economic indicators largely shaped the U.S. economy in May 2025. The first quarter of 2025 saw a slight contraction in real GDP by 0.2%, primarily due to a surge in imports as businesses front-ran tariff implementations. Consumer confidence slumped and recession fears surged. However, since a ninety-day pause on China tariffs was instated in May, consumer confidence has seen a partial rebound. As consumers relax in this “eye of the storm,” tariff plans should be finalized in July, and the state of the economic landscape will become clearer. 

The Federal Reserve kept interest rates unchanged at its May meeting, opting to wait for clearer data on the effects of tariffs on both growth and inflation before considering any rate adjustments. The tariffs, while temporarily eased in some instances, continue to be a significant factor, leading to increased input costs for manufacturers and concerns about their long-term impact on consumer purchasing power and overall economic growth. This puts the Federal Reserve in a difficult position regarding lowering rates to boost spending versus holding rates where they are to brace against further inflation risks.

Geopolitical turbulence persists with the Russia-Ukraine and Israel-Hamas wars grinding on interminably, as well as these U.S. trade tensions. Oil prices are at $61/barrel.

The yield curve is now inverted to flat through the 10-year. The 10-year Treasury is at 4.47, which is up 24bps from last month. The one-year is at 4.16, which is up 24bps from last month. The 30-year fixed rate mortgage is at 6.94%, which is up 17bp from last month.

Prepay speeds remain low, although speeds on coupons above 6% are beginning to rise. The secondary market for servicing rights remains alive but cautious in its pricing.

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