Small Caps, Treasuries Rally as Investors Await London News: June 9, 2025

Market participants are patiently awaiting news from London as top leaders representing Washington and Beijing meet to discuss trade matters. Positive breakthroughs are likely to drive a continuation in the risk asset rally while negative developments may lead to some selling pressure. So far today, investors are picking up equities across sectors and Treasuries along the curve. Shares in the small-cap space are seeing significant interest on a relative basis with the Russell 2000 advancing a solid 0.8% while the other benchmarks are achieving modest gains. Meanwhile, folks are also increasing their commodity exposure ex nat gas as well as holdings of forecast contracts and bitcoins. Lighter yields are weighing on the greenback ahead of rates facing demand tests this week. Indeed, the GOP’s taxation package is experiencing resistance in the upper and lower chambers of Congress related to disagreements by policymakers, ranging from the right-leaning hardliners of the Freedom Caucus to the moderate-wing Republican senators. Furthermore, fixed-income players will be closely watching the results from Treasury auctions occurring Tuesday, Wednesday and Thursday involving $119 billion of maturities at the belly of the curve out to the 30-year duration.

Weren’t Small Caps Rate Sensitive?

An interesting dynamic in the past few weeks has been the strength of small-cap equities in the face of rising yields. The smaller, more vulnerable firms in the cyclically tilted Russell 2000 are over-levered to the domestic economy relative to the other major benchmarks, which are heavily exposed to the global landscape when considering scale and the source of revenues. The interest in these names is emblematic of investors dialing up US growth expectations as they express confidence that GDP will be expand solidly in future quarters. Indeed, the Russell 2000 could finally see a few years of outperformance, shall the reacceleration theme coincide with progress on the manufacturing onshoring front. Add a mid-cycle rate cut or two to the mix and the space rallies fiercely.

International Roundup

Factory Deflation Persists Amidst US Export Plunge

The Chinese Producer Price Index (PPI) fell at its sharpest pace in almost two years, as reduced US exports weighed on revenue possibilities. Indeed, products sold to the world’s largest economy were down 34.5% year over year (y/y) last month, while the PPI plunged 3.3% y/y, the most in 22 months. The result came in below the 3.2% median estimate and April’s 2.7% decline. The indicator has been in deflation for nearly 3 years, since October 2022. Efforts from Beijing’s policymakers to stimulate the economy from both fiscal and monetary angles have so far failed to counter the significant trade headwinds amidst elevated levels of uncertainty.  

Consumer Prices Deflate Too

Beijing’s struggling economy continued to experience retreating pricing power in the face of weak demand. The Consumer Price Index (CPI) dropped 0.2% in May after rising 0.1% in April. On an annualized basis, charges declined for the fourth consecutive month. Indeed, May’s CPI fell 0.1% y/y, an unchanged pace from the previous period but a tenth of a percent north of expectations. Lower costs for automobiles contributed to the deflationary pressure amidst fierce competition across electric vehicle manufacturers. Anecdotal evidence suggests that car dealerships are engaged in price wars against each other.