Trade hopes, Fed doubts, and market uncertainty

U.S. trade policy

While uncertainty remains around U.S. trade policy, last week brought signs of hope that the administration could make progress relatively quickly. National Economic Council Director Kevin Hassett stated that the White House is working on trade deals with 15 countries, and President Trump mentioned in multiple appearances that he would like a deal with China. President Trump also expressed confidence in a deal with the EU and Japan, although he shared no definitive timeline and few details. Overall, the markets seemed to embrace the idea that the tariffs are being used as a negotiation tool and will not be permanent. However, volatility will likely remain until deals are announced across all major trading partners.

As it relates to yields, there again seems to be diverging beliefs about the path for rates. President Trump made it clear he believes rates should be coming down at this point, highlighting the decline in oil prices and the progress on inflation. He also stated that the Fed has been consistently late when adjusting policy. However, Chair Powell has not wavered in his belief that rate cuts are not yet warranted, given the potential impact of tariffs.

While the President is unlikely to try to remove Chair Powell, a new Fed Chair may be named later this year ahead of Chair Powell’s term ending in May 2026. This would undermine the credibility of the current chair as the markets would look ahead to future policy direction. This story is likely to unfold in the coming weeks, but it would be prudent for officials to bring some clarity to the markets, as we are watching a number of atypical market moves, not the least of which is the divergence between long-term yields and the USD. As the dollar is falling and long-term yields are rising, it leaves many wondering if there is a move away from all USD-based assets or just a short-term divergence.

Other key releases and news

In other economic news released last week, the picture remains unclear with diverging reports. Both the Empire State and Philadelphia Fed manufacturing indexes were released, and both were negative. More concerning in these releases is the prices paid component of the index, which is rising quickly. While the regional manufacturing indexes are volatile, the prices paid components are typically helpful in forecasting inflationary trends, and they are pointing to an uptick in inflation, making the Fed’s position even more precarious. We did get a release for the import and export prices, with import prices declining. However, that report is not capturing the impact of tariffs yet, which will take time to work through the economy.

Retail sales were very strong at 1.4%, however, there is speculation that many consumers were front-running tariffs, especially with automobile purchases. It will be important to watch this number in the coming months to see if consumers are finally changing their spending behaviors and are going to pull back, which would certainly create headwinds for the economy. Housing starts were also released and at 1.32M units, they were down 11.4% from the prior month. This is not a good sign for consumers looking to purchase a home, as these numbers indicate new supply is not likely to bring down home prices any time soon. Finally, defying many beliefs that the labor market is going to begin to crack, jobless claims remain remarkably well-behaved at just 215,000. In summary, just like in previous weeks, the economic data is not painting a clear picture, and this will likely continue until the markets get clarity on U.S. trade and fiscal policy.

The week ahead

PMIs, durable goods, and consumer sentiment will be released this week.