The equity markets staged a powerful rally this past week following the 90-day pause of tariffs on some of the items being imported into the United States from China as well as several deals that were negotiated on behalf of U.S. Companies by President Trump during his visit to the Middle East. It also didn’t hurt that inflation at the Retail and Wholesale Levels as measured by the Consumer and Producer Price Indexes along with Initial Claims for Unemployment Benefits pointed to a lessening of inflation and a resilient labor market.
- The pivot by the President on the morning of April 9th has led to an impressive rebound in the equity markets. Although we remain concerned about the long-term impact of tariffs on the U.S. Economy, that pivot put at least a temporary floor under the market which our clients have benefited from greatly. Nonetheless, we are not yet convinced that markets remain rangebound and in a calm before some additional volatility kicks up as the initial 90-day pause draws nearer (early July). For now, we are grateful for this peace.
- Citing growth in government debt, late Friday Moody’s became the last of the credit agencies to downgrade the rating on U.S. sovereign debt. In a statement, Moody’s noted that “this one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.” It remains to be seen what the impact of this downgrade will be, if any, as U.S. debt remains somewhat of the “cleanest shirt in a pile of dirty laundry.” However, it should not be ignored as over the long-term we believe the U.S. is on an unsustainable course regarding the increasing debt resulting from annual budget deficits.
- The President has a “little problem with Tim Cook.” On Thursday, President Trump stated that “I said to him, ‘my friend, I treated you very good. You’re coming here with $500 billion, but now I hear you’re building all over India.’ I don’t want you building in India.” Stay tuned.
- Microsoft announced this past Tuesday that it was laying off about 6,000 workers or 3% of its 200,000 workforce. The company released the following statement. “We continue to implement organizational changes necessary to best position the company for success in a dynamic marketplace.” Rather than a negative comment on its business outlook, we believe this layoff has more to do with the accelerating momentum from the implementation of Artificial Intelligence (AI).
- Fed Chair Jerome Powell stated that “higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s” and that “we may be entering a period of more frequent, and potentially more persistent, supply shocks – a difficult challenge for the country and central banks.” We believe that the period of the 2010s where inflation was well under 2% was the anomaly and that the current environment within which we reside is not the new norm, but the norm. Get used to it.
It’s The Economy…”
- The University of Michigan reported that the Preliminary May Reading of Consumer Sentiment fell to 50.8 (-26.5%) from a final April 52.2 but held steady as compared to the preliminary April release. According to the Survey of Consumers Director, Joanne Hsu, “year-ahead inflation expectations surged from 6.5% last month to 7.3% this month. This month’s rise was seen among Democrats and Republicans alike.” (Source, University of Michigan)
- Housing Starts jumped 1.6% or by 21,000 to a seasonally adjusted annualized rate (SAAR) of 1,361,000 during April as compared to 1,339,000 in March (-1.7% y/y). During April, Single-family housing starts fell 2.1% as Multifamily housing starts rose 10.7%. Building Permits, a key barometer of future starts, fell 59,000 to 1,412,000 in April as compared to March (-3.2% y/y). (Source, U.S. Census Bureau)
- Prices at the wholesale level as measured by the Producer Price Index slid 0.5% during April, after remaining unchanged during March. Over the past year the PPI has risen 2.4%, down from 3.2% in February and from a peak rate of 11.7% during March 2023. Energy prices fell 0.4% during April (-8.1% y/y) after sliding 3.8% in March. Finished food prices fell 1.0% during April (3.0% y/y) after falling 2.1% in March. (Source, U.S. Bureau of Labor Statistics)
- Retail Sales increased 0.1% during April (5.2% y/y), after rising 1.7% in March. Spending on Motor Vehicle & Parts slid 0.1% during April (9.4% y/y) after surging 5.5% in March. Retail Sales Excluding Motor Vehicles & Parts rose 0.1% (4.2% y/y). Two key components of this report, Sales at Gasoline Stations fell 0.5% during April (-6.8% y/y) whereas Restaurant and Drinking Place Sales rose 1.2% during April (2.7% y/y) after rising 3.0% in March. (Source, U.S. Census Bureau)
- The Consumer Price Index rose 0.2% during April (2.3% y/y), after easing 0.1% during March. The CPI has fallen from a y/y high of 9.1% during June 2022 and matches the cycle low set in February 2021. Energy prices rose 0.7% during April (-3.7% y/y) while food and beverage prices fell 0.1%. The cost of shelter rose 0.3% during April (4.0% y/y), after rising 0.2% during March. Excluding food and energy, the core CPI rose 0.2%, after rising by 0.1% during March. Over the past year the core CPI has risen 2.8% y/y, the weakest in four years. (Source, U.S. Bureau of Labor Statistics)