5/16/25: Trade Talks and Easing Inflation Lifts Markets

The outcome of negotiations between the U.S. and China in Geneva, Switzerland, established the tone for markets this week. The progress made by the two largest economies was a pleasant surprise for market participants with more negotiations planned in the coming weeks. Each country will cut tariffs by 115%, with the U.S. cutting imports from 145% to 30%, and China cutting tariffs on U.S. imports from 125% to 10% for a period of 90 days.

In other news this week, U.S. inflation rose less than forecasted in April with the consumer price index increasing 0.2% month-over-month and 2.3% year-over-year. The headline inflation rate of 2.3% is the lowest since the spring of 2021. Core CPI, excluding food and energy, rose 0.2% month-over-month and 2.8% year-over-year. Consistent with recent reports, shelter costs accounted for more than half of the overall monthly gain. U.S. producer prices unexpectantly fell in April by 0.5% but on a year-over-year basis were up 2.4%. April final demand prices excluding food and energy were down 0.4% month-over-month and up 3.1% year-over-year. Although the inflation data this week was constructive, Walmart warned Thursday that price increases look certain, and it remains likely that prices for consumers and businesses will move higher in the coming months.

U.S. Retail Sales slowed in April, with a 0.1% increase in retail purchases, with seven of the thirteen report categories posting decreases. Consumers cut back spending on cars, sporting goods, and other imported goods. Control-group sales, which feed into gross domestic product, declined by 0.2% month-over-month, missing expectations of a 0.34% increase. The surprise decline in the control group suggests a cautious consumer influenced by concerns over tariffs leading to inflation. While overall consumption remains strong, the slowdown could indicate challenges ahead.

This morning’s preliminary University of Michigan Sentiment Index fell in May to 50.8 down from a final reading of 52.2 in April. The May number is the second lowest reading on record with U.S. consumers becoming increasingly worried that tariffs will lead to higher inflation. Consumers expect inflation to rise 7.3% over the next year, the highest since 1981 and 4.6% over the next five to ten years. Of note, the survey was conducted between Aprill 22 and May 13, a period that ended just after the U.S. and China agreed to temporarily reduce tariffs while they attempt to negotiate a long-term trade deal.

Despite concerns generated by the weak consumer sentiment report, the overall market tone remained positive this week, with Treasury yields moving slightly higher and equities as represented by the S&P 500 now in positive territory for the year. In this uncertain economic and market environment, we still expect the Fed to engage in a modest amount of easing this year which should support front end rates and a steeper yield curve.

Next week:  Leading Index (LEI), Philadelphia Fed Non-Manufacturing, Chicago Fed National Activity Index (CFNAI), S&P Global US Manufacturing and Services, Existing Home Sales, Jobless Claims, Continuing Claims, New Home Sales, Building Permits.

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