China Hanging On

Meanwhile, The Dollar Has Stabilized

The market is continuing the settling down process following a volatile April featuring peak trade uncertainty. As of now, the escalation seems to be taking a pause and, while we’re still seeing things, such as the 100% tariff threat on foreign films, being thrown about, the days of raising blanket tariff rates to more than 100% seem to be in the rearview mirror for now. The reduction in volatility has allowed equities to produce a decent rebound over the past 2-3 weeks, but the core long-term issues remain. Even a significant reduction in tariff rates is likely to produce a meaningful economic slowdown and a potential recession can’t be written off. With the S&P 500 only 8% below its all-time high, this looks like the latest attempt to suck the bulls back in under the guise of easing trade tensions. Given the direction that the hard data is beginning to head in and viewing the “re-rally” in gold as a signal, I think there’s a good possibility that this is just a short-term bounce on the way to retesting recent lows.

The Fed meeting is up next this week. While there’s almost no chance that Powell & company are going to make a rate adjustment this week, the markets will still be listening closely for hints of where the future monetary policy path might be heading. So far, the Fed has maintained a “wait-and-see” approach, choosing to hold off on any rate changes until they get more clarity on the growth vs. inflation battle. The data hasn’t really given any firm indication as to which side is winning. GDP growth turned negative in Q1 and the manufacturing sector has been slowing down quickly, but those developments were largely expected. On the other side of the coin, PCE prices, the Fed’s preferred inflation measure, rose at an annualized clip of 3.6% in Q1, the highest it’s been in two years. I suspect the Fed will continue to take a middle of the road view, but pressures building in both directions mean that the central bank needs to get this right. A week ago, the market priced in a ⅔ chance of a June rate cut. Today, that number is down to 30%.

The Q1 earnings season largely delivered what the market was expecting, which was steady profit growth and a continued resilience in the face of an uncertain outlook. Many companies, as expected, warned of tariff risks and some even yanked their 2025 guidance off the table altogether until they understood tariff risk better. Big tech had a successful quarter, which translated into the sector leading the market higher over the past couple weeks, but it’s the consumer names I’m more interested in watching. UPS and FedEx both issued warnings about the direction of the economy, but McDonald’s big miss on same store sales growth was particularly concerning. This company tends to be a pretty durable revenue generator and to see it struggling doesn’t portend well for the supposed strength and resilience of the U.S. consumer.