Now What?

Too Many Moving Parts

There are almost too many moving parts right now to get a handle on everything going on, but let’s give it a try.

Trump finally decided enough was enough and decided to pause tariff implementation on a number of trade partners. China has pretty much become the sole target and with tariff rates up to 125% from both sides, this trade war is far from over. It seems like stock market volatility wasn’t enough to elicit a response from Trump, but bond market volatility was. Trump’s goal for a while has been to lower interest rates in the United States. It seems very likely at this point that China and Japan were successful in driving rates higher by dumping Treasuries on the market, despite stock prices diving lower. It’s hard to say if China has the upper hand now in trade negotiations, but I think we know what Trump’s trigger point is now.

China said it’s drawing the line at a 125% tariff rate. Perhaps escalation is hitting its peak and sentiment has room to improve here.

U.S. CPI and PPI readings for March came in way below expectations and probably clears the path for the Fed to cut rates, possibly as soon as next month. The annualized headline inflation rate is down to 2.4% and the core rate fell to 2.8%, the first time it’s been below 3% in four years. Keep in mind that this was pre-Liberation Day, so we could very well see a spike coming in April’s reading. The backdrop for this reading could very well be a product of deteriorating sentiment and expectations for a possible recession. University of Michigan consumer confidence came in well below expectations in April and fell to a nearly 3-year low. The big number, however, was 1-year inflation expectations. That number soared to 6.7%, up from just 3.3% in January and its highest level since 1981!

In previous months, a significant drop in CPI and PPI numbers would have been more than enough to trigger a rally in equities. Not this time because investors and consumers have probably figured out what’s coming. We’ll see what shows up in the data over the next few months, but the street doesn’t seem to feel much better even after the falling CPI and PPI readings.