RenMac Off-Script: Navigating Tariff Turmoil and Market Crosscurrents in 2025

In a candid "Off-Script" discussion dated May 30, 2025, RenMac analysts Jeff DeGraff, Neil Dutta, and Steve Pav dissected the contentious issue of tariffs—dubbed "TACO: Tariffs Are Constitutional Or Not"—and its sprawling implications for markets, the economy, and policy. Their core thesis: despite legal challenges, the prevailing administration's commitment to tariffs remains unshaken, injecting sustained uncertainty into an already complex global economic landscape, with significant knock-on effects for labor markets, fiscal policy, and investment strategy.

Key Insights

1. Tariff Tangle: Legal Setbacks Unlikely to Derail Administration's Trade Agenda, Prolonging Market Uncertainty

Attribution: Steve Pav

Quote: "I think the market eventually caught onto what I would agree is that the idea that Trump is just going to abandon his tariff policy because some courts tell him he can't use one of the authorities the way he wants to apply it is not going to stop Trump from pursuing his tariff policy and trade goals... Trump's going to continue to Trump and that means tariffs are continue to be a factor."

Steve Pav detailed how recent Court of International Trade rulings, which found certain IPA tariffs "illegal as applied," are unlikely to halt the administration's tariff-centric trade policy. While the ruling initially sparked market optimism, the administration quickly appealed and secured a stay, meaning tariff collection continues. Pav emphasized that President Trump has alternative authorities, such as Section 122 (allowing tariffs up to 15% for 150 days) and the more legally durable Section 301 (underpinning existing China tariffs), to achieve his objectives. This legal maneuvering, Pav argued, simply adds layers of uncertainty.

The ongoing legal battles and the administration's signaling of alternative tools suggest that businesses and investors should not expect a swift resolution or a rollback of tariffs. Upcoming events like the OECD talks in Paris (attended by USTR Jameson Greer) and the G7 leaders summit over Father's Day weekend are critical junctures to watch for potential shifts or de-escalation, particularly concerning the threatened "draconian reciprocal tariffs" with a July 9th reciprocal date. However, the baseline expectation is for continued trade friction.

Actionable Takeaway: Investors should brace for prolonged trade policy uncertainty. Companies with significant international supply chains or exposure to targeted sectors remain at risk. Diversification and hedging strategies against currency and trade-related volatility are paramount. Monitor developments around the G7 summit and OECD talks for any signs of policy shifts.

2. Beyond the Headlines: Rising Extended Unemployment Claims Signal Deeper Labor Market Weakness

Attribution: Neil Dutta

Quote: "But at the same time, that hasn't been enough to stop the unemployment rate from going up over the last number of years. It also hasn't stopped continuing claims from going up. So continuing claims are at a cycle high and initial claims remain relatively low. But what that tells you is that rates of job finding are very, very weak, which is why this well of unemployed people continues to be build."

Neil Dutta highlighted a critical, yet perhaps underappreciated, divergence in labor market indicators. While initial jobless claims remain low—a point often cited by growth bulls—extended unemployment claims are steadily rising and continuing claims are at a cycle high. Dutta explained this indicates very weak "rates of job finding," meaning individuals who lose their jobs are struggling for longer to find new employment. This buildup of unemployed individuals could lead to an increase in permanent job losers.

This nuanced view challenges the simplistic interpretation of low initial claims as a sign of robust labor health. Dutta warned that the unemployment rate could see a 0.1% or 0.2% increase in upcoming reports (referring to the May 2025 jobs report), which could surprise markets. This underlying weakness is crucial because a deteriorating labor market has broad implications for consumer spending and overall economic growth.

Actionable Takeaway: Investors should look beyond headline initial jobless claims and pay closer attention to continuing claims and the unemployment duration. A sustained rise in these figures could signal a more significant economic slowdown than currently perceived, potentially impacting consumer discretionary sectors and warranting a more defensive portfolio posture.

3. The "Big Beautiful Bill" Gamble: Deficit Concerns Mount, But Global Forces May Steer Bond Yields More Than Domestic Spending

Attribution: Steve Pav (on the bill's passage), Neil Dutta (on bond market drivers), Jeff DeGraff (on bond vigilantes)

Quote (Neil Dutta): "It's not that people don't want to hold US long bonds. They don't want to hold long bonds generally. The curve is steepening, has been steepening not just in the US but everywhere. So to me, that's not necessarily something that's being driven by US fiscal dynamics..."

The discussion around a major fiscal package (the "big beautiful bill") revealed concerns about its deficit impact. Steve Pav suggested that while the House passed a version with sunset clauses on tax provisions to improve its scoring, the Senate is likely to push for permanency, potentially worsening the deficit. He noted this 2025 bill primarily extends current policy, lacking the growth drivers of the 2017 tax cuts. Despite Jeff DeGraff's expressed disgust at the lack of fiscal austerity, Pav believes the political imperative to avoid a $4 trillion tax increase will ensure the bill's passage, likely before the August 2025 recess.

However, Neil Dutta offered a contrarian view on the bill's immediate impact on bond yields. He argued that the market has largely priced in the passage of such legislation by a unified Republican government. More significantly, Dutta posited that global factors are the primary drivers of rising long-term interest rates, not just US-centric fiscal concerns. He pointed to a global steepening of yield curves and the unwinding of the Yen carry trade as more influential. Jeff DeGraff noted that the 10-year Treasury yield at 4.41% was still below his "bond vigilante-esque" threshold of 4.75%.

Actionable Takeaway: While US fiscal trajectories warrant long-term caution, investors should not overreact to domestic fiscal news in isolation for bond market positioning. Monitor global bond market trends, central bank policies in other major economies (like Japan), and currency dynamics (e.g., Yen carry trade unwind) for more immediate cues on interest rate direction. The passage of the fiscal bill itself might be a "sell the news" event for yields if global disinflationary pressures re-emerge or if the bill is already fully discounted.

4. Housing's Headwinds: 7% Mortgage Rates and Shifting Inventory Dynamics Threaten Construction and Related Employment

Attribution: Neil Dutta

Quote: "I think the big story is that the housing market can't really work with interest rates hovering at maybe even slightly below 7%. It just doesn't work... Now units under construction are kind of plumbing new depths and home prices are contracting."

Neil Dutta painted a challenging picture for the U.S. housing market, asserting it "just doesn't work" with mortgage rates around 7%. This affordability crisis is leading to sellers making more price concessions, homes sitting on the market longer, and rising inventories, particularly in the South and West—key new construction regions. A crucial shift is occurring: homebuilders, who previously benefited from a lack of resale competition, now face increasing pressure from this rising resale inventory.

This dynamic is leading to a contraction in home prices and a concerning decline in units under construction, which are "plumbing new depths." Dutta warned that these trends could have a more significant impact on housing-related employment than investors currently appreciate, noting that employment in residential construction and contract work has already been declining. The ancillary effects on industries supplying home construction (lumber, appliances, furniture) could also become more pronounced.

Actionable Takeaway: Investors should be cautious about exposure to homebuilders and related sectors if mortgage rates remain elevated and inventory continues to rise. The slowdown could be deeper and more prolonged than anticipated, impacting not just construction but also a wide array of manufacturing and service jobs tied to the housing ecosystem. Watch for further declines in units under construction and housing-related employment data.

5. Capex Caution: Lingering Trade Uncertainty and Softening Demand Stifle Business Investment

Attribution: Neil Dutta

Quote: "But durably, is there any reason for people to invest a lot right now? No, because the uncertainty remains high. And more importantly, the underlying trend in the economy is getting worse, not better. Ultimately, investment is going to follow an accelerator effect. If companies see what demand is and they invest more today."

The persistent uncertainty surrounding trade policy, coupled with a weakening underlying economic trend, is creating a difficult environment for capital expenditure, according to Neil Dutta. He noted a significant decline in core capital goods orders in April 2025 and only a modest decline in shipments, with May survey data looking mixed. Dutta emphasized a first principle of investment: it follows demand (the "accelerator effect"). With expectations of lower future demand, there's less incentive for businesses to invest today.

This contradicts theories that high capacity utilization drives investment; Dutta pointed out that business investment often rises early in a cycle when capacity utilization is low. The current environment of high uncertainty, particularly from unpredictable tariff policies, makes long-term capital allocation decisions exceptionally challenging for businesses. This reluctance to invest can further dampen economic growth and productivity.

Actionable Takeaway: The outlook for capex-sensitive sectors may remain subdued as long as trade uncertainties persist and demand signals are weak. Investors should favor companies with strong balance sheets, resilient demand for their products/services, and less reliance on extensive new capital projects in uncertain regulatory environments. Any resolution or clarification on trade policy could be a positive catalyst for capex.

Insightful Quotes

• Steve Pav on the administration's tariff strategy: "So if you think somehow this is just going to go away from the courts, I wouldn't bet on that." (Highlighting the administration's determination and multiple avenues to pursue tariffs.)
• Neil Dutta on the difficulty of business planning: "I mean, you know, the court, you know, rules the tariffs null and void. It's like, oh great, I guess I shouldn't have reshored that factory. And now that's been ruled null and void. Oops, you know, kind of, I mean, so it's really difficult to make decisions in this kind of an environment." (Emphasizing the real-world impact of policy whiplash.)
• Jeff DeGraff on market seasonality and contrarian thinking: "So what you really end up with is a sell in July and then come back in October. So I guess if we had to put a quip in that, it would be say goodbye in July and the Bears over in October. So maybe that'll catch on." (Challenging the common "sell in May" adage with a data-backed alternative.)

Market Implications

The RenMac team's discussion underscores a market environment in May 2025 characterized by significant crosscurrents. The persistence of tariff uncertainty, as detailed by Steve Pav, suggests continued volatility for internationally exposed sectors and a potential drag on global growth. This directly feeds into Neil Dutta's concerns about capex stagnation, as businesses hesitate to commit capital amidst unpredictable trade rules and softening demand.

Neil Dutta's focus on rising extended unemployment claims offers a crucial leading indicator for a broader economic slowdown. If this trend continues, consumer discretionary spending could come under pressure, favoring more defensive sectors. The housing market's struggles at 7% mortgage rates further reinforce this cautious outlook, with potential negative impacts on builders, related industries, and financial institutions with mortgage exposure.

For bond investors, Neil Dutta's argument that global factors and the Yen carry trade unwind are more influential than purely domestic US fiscal news is key. This implies that a simple "more US debt equals higher US yields" thesis may be overly simplistic. Investors should monitor global liquidity conditions and central bank actions worldwide. Jeff DeGraff's technical levels for the 10-year yield (4.75% as a critical threshold) and observations on yield curve dynamics across durations (30-year breakout potential, 2-year downtrend) provide a framework for navigating fixed income.

In equities, Jeff DeGraff's analysis of market sentiment (currently neutral after an extreme low) and seasonality (favoring a "sell in July, return in October" pattern) suggests a period of consolidation might be underway. He emphasizes watching relative performance and momentum to identify future leadership, noting that a transition from Beta to discretionary stocks would be positive, while a shift to staples would be bearish. The S&P 500 levels of support at 5700 and resistance around 6150 serve as near-term guideposts.

Overall, the insights from RenMac advocate for a nuanced investment approach: one that acknowledges persistent policy risks, digs deeper into economic data beyond surface-level readings, and appreciates the interconnectedness of global markets. Agility and a focus on quality and resilience will be crucial in navigating the tariff headwinds and economic shifts anticipated through 2025.