Consumers “On Edge” as Stock Markets Rally on Tariff Pause Optimism, Fed “Waits for Greater Clarity,” CPI/PPI Dovish (For Now), Moody’s Downgrades U.S. Debt   

This week started with optimism on trade, as trade talks between the U.S. and China continue, with both sides toning down the rhetoric. Markets are hoping that a “critical mass” of trade agreements can be worked out before the 90-day “pause” ends in early July.

The data: the April CPI report showed 2.3% annual inflation, the lowest since April 2021. April PPI (wholesale prices) actually dropped in April. Both reports were relatively “dovish” on inflation, but it could be the “calm before the storm,” as May, June, and July may see inflation depending on tariff effects.

Consumer behavior has been “distorted” over the past few months due to anticipation of tariff effects. Car sales spiked as buyers engaged in “front running,” speeding up purchase decisions on big-ticket items before potential price increases kicked in. April also saw a pullback in many smaller, non-core purchases (e.g., more groceries, fewer restaurants). Today’s report indicated consumer confidence at the second-lowest level in the history of the report (down 30% since January). Also, consumer inflation expectations spiked to 7.3%.

Fed Chair Powell spoke this week: tariffs and accompanying “supply shocks” are likely to move us further away from the Fed’s goals. They may affect both prices and employment negatively, thereby creating a “dilemma” regarding the “dual mandate” of price control and full employment. He stressed that the Fed is “well positioned to wait for greater clarity.” Translation: we aren’t moving rates until we see how this all shakes out. Fed futures markets pushed out predictions of the next rate cut out to September as June and July rate cut odds plummeted. Economic reports for the next few months may be volatile depending on a range of factors.

Downgrade: Moody’s just downgraded the U.S. credit rating to below AAA, citing persistent deficit spending. Fitch and S&P had already downgraded the U.S. from the top rating, so Moody’s had been a holdout. Note that Congress is planning on increasing the debt ceiling by $4 trillion as part of the annual budget negotiations. Treasuries immediately spiked in the last minutes of the trading week. The 10-year Treasury is back near 4.50%. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.