June 30th, 2025 - The big, big spenders.

For those of a certain age, the tune of the "Big Spender" song must have emerged into their minds, as they were reading last week's news. In particular, the agreement of the European NATO members to significantly increase defense spending up to 3.5% of GDP by 2035 and another 1.5% on "surrounding infrastructure", with Spain being granted an exception. From an equity investment point of view, the agreement does not offer any new information that is not already in the inflated prices of defense stocks, which most of them hit their highs a few weeks ago and have been more or less correcting since. The new targets were already known and traded in early June, and the 2035 year is too far away to seriously consider that this target will be met. There are so many other long-term targets that the EU or any other institution have failed to meet anyway, including those of the (now almost abandoned sector of) clean energy. Still, the defense sector looks poised to be well bid in the medium-term, as revenue growth is indeed guaranteed for at least the visible investment horizon of 1-2 years.

Germany's large infrastructure spending plans were also in focus, now officially approved by the cabinet. As a reminder, the new government has decided to abort the constitutional obligation for a balanced budget and had announced a 500bn+ Euro spending plan for defense and infrastructure (roads, bridges, railways, electrical grids etc.). This is major news for Europe, as Germany has been the laggard economy for years and a strong economic rebound there would soon spill over into the rest of the region. The AAA rating of the German government looks safe for now, as the increased borrowing to fund this spending will still leave the Debt/GDP ratio comfortably below 100%. Although for many years the north European countries and especially Germany had been criticizing the south and primarily Greece for frivolous government spending, it seems that now a new big spender has emerged.

Inflation data are back on our radar, especially now that tariffs are in place and government spending leads to higher economic activity. Tomorrow (July 1st) the June Eurozone Composite numbers are due and are expected to show a slight increase to 2% for the headline and unchanged for core. Already on Friday France's inflation was announced, rising 0.8%, higher both than the 0.6% increase in May, and the expected +0.7%. The increase was attributed primarily to an acceleration in the prices of services, particularly those of accommodation, health and transport. In Spain, inflation rose by 2.2%, higher than the expected 2.0%. In the US, the PCE Deflator which is the FED's favorite metric of inflation rose as expected to 2.3%, from 2.2% the previous month, while core prices rose to 2.7%, from 2.6% previously (all rates are on a year-over-year basis).

The June Eurozone PMI surveys did not show any impact from tariffs yet, but remained at low levels, as companies appear to be in a "wait and see" mode. The Composite PMI was unchanged at 50.2, marginally above the neutral level of 50. The Services PMI rose 0.3 points to 50, while the Manufacturing PMI was unchanged at 49.4. Looking into country details, the German Services PMI jumped by 2.3 to 49.4, while the Manufacturing PMI rose by a more moderate 0.7 points to 49. In sharp contrast, the French Composite PMI fell 0.8 points to 48.5. The drop was primarily driven by a 2-point decline in the Manufacturing PMI to 47.8, while the Services PMI dropped by a more moderate 0.2 points to 48.7.

The US macro data continued to show a weakening (but not collapsing yet) economy. The June Conference Board consumer confidence missed expectations, falling back near its March levels. The present situations index was the weakest since September 2024 and the expectations index also moved lower. The labor market differential (those who say jobs are plentiful vs hard to get) narrowed 1.6 points, in another sign of a tightening labor market. The weekly jobless claims fell 10k to 236k, but the continuing claims rose further to 1.974mn from 1.937mn the previous high, which is the highest level since November 2021.

The final estimate of Q1 GDP was revised down to -0.5%, versus the -0.2% previously estimated. The majority of the revision was driven by a 0.7% downward revision to the pace of consumer spending, from 1.2% to 0.5%, with most of the drop seen in services, rather than goods. Services spending was revised down to 0.6%, which is the slowest quarterly pace since 2020. In other data, USD personal spending in May came in at -0.1%, worse than expectations (+0.1%) and personal income also fell (-0.4%) vs expectations for+0.3%.

Fed Chair Powell was the "person of interest" last week. He held his two-day semi-annual monetary policy testimony to Congress, where he largely maintained the wait-and see-approach to rate cuts and reiterated that tariffs will likely push up inflation and weigh on economic activity. At the same time, the Wall Street Journal cited sources that Trump is already considering candidates to replace him, noting of course that his term is not up until May 2026. We have the suspicion that the discussions are not that early. The White House is already considering nominating someone to replace Mrs. Adriana Kugler as Governor when her term ends on January 31, 2026 and then that person could simply retain that Governor seat and slide into the Chair position in May. So, we could have an idea of who Trump has in mind as early as within the next 4-6 months. Over the weekend, Trump tweeted that he "would select a FED Chair that only cuts rates"...

Equities had strong week, as the Iran-Israel ceasefire and the big European spending plans, sparked enthusiasm. The US indices managed to break out to record highs and now the S&P500 is up 5% for the year, same as Nasdaq. European markets have been underperforming during the last few weeks, as they hit their highs in early June and the market has rotated back into the US, since then. US small caps remain negative for the year (-2.5%) and the German DAX remains the best performing market (+20.7%) among the major ones.

Bonds had a rather mixed week. USD yields moved lower as the macro economic data have been week lately and as the FED confirmed its willingness to further cut rates in the remaining six months of the year. The 10yr USD treasury dropped to a low of 4.25%. But the European "renaissance" theme is a natural headwind for EUR bond yields to move lower, and we would hence refrain from adding to new positions in medium to long-term bonds (over 5 years), even though the German 10y is now back at 2.60%.

Chart of the Week : European sectors' diverge performance offers opportunities.

The above chart shows the performance of the European sectors for the first half of this year (data until Friday, June 27th). It is really interesting to see that despite the hype for Germany's large planned spending, the top performing sectors include sectors such as Utilities and Telecoms, which could be considered rather defensive. Materials, Technology and especially the economic sensitive Discretionary sector have had a horrible performance. Perhaps, and each for different reasons, they could be the next beneficiaries of this theme. In the Materials sector, it is only the cement companies which have significantly outperformed, leaving behind the major miners (Rio Tinto, BHP) and companies like Sika, Linde, Air Liquide whose cyclical characteristics as well as their exposure to the theme should help their stocks recover. The discretionary sector, where there has been a massacre and valuations are very attractive, should also be bought if someone believes in this "European Renaissance" theme, as higher economic activity should lead to higher consumer spending, in autos, hotels, travel and why not luxury. The second half might look a lot different.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week : KSH/FactSet Cover photo: