MNI US Macro Weekly: Trade De-Escalation, Consumer Hesitation

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May-16 18:19By: Tim Cooper and 1 more...
Federal Reserve

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EXECUTIVE SUMMARY

  • A larger than expected de-escalation in US-China trade policies on Monday following weekend talks in Geneva set the tone for the week. ‘Recent’ US tariffs on China are being cut from 145% to 30% (20% fentanyl + 10% ‘reciprocal’) and China tariffs on US from 125% to 10% for a 90-day period.
  • CPI and PPI releases have seen a marking lower in April core PCE inflation estimate to another soft print of circa 0.13% M/M, although that will be offset by an upward revision to March’s 0.03% M/M.
  • Core retail sale metrics meanwhile disappointed in April as they pulled back after clear tariff front-running in March, but they showed few decisive signs of consumer weakness on balance.
  • Hard consumer spending data continue to bely some extremely weak sentiment readings, something that extended further with the U.Mich preliminary May reading falling to its second lowest ever reading.
  • The U.Mich report however had an important caveat that “Many survey measures showed some signs of improvement following the temporary reduction of China tariffs, but these initial upticks were too small to alter the overall picture”. The preliminary survey was conducted Apr 22-May 13 and so only just captured the May 12 de-escalation in US-China trade policies.  
  • Fedspeak continued to reinforce there is no rush to cut rates amid uncertainty, whilst Powell gave remarks indicating the upcoming framework review will focus on average inflation targeting and communications.
  • Early signs were that the US-China détente didn’t greatly change FOMC members’ outlooks.
  • Fed Funds have seen a further hawkish adjustment this week, with just 9bp of cuts priced for the July meeting and not quite fully pricing it for September either (23bp). The 53bp of cuts priced for 2025 leaves it back close to the median 50bp of cuts in the March SEP from what feels like a long time ago.
  • The temporary thawing in trade hostilities has also seen various view changes from analysts, including Barclays, JPMorgan and TD Securities now all looking for a next Fed cut only in 4Q25.
  • The data flow slows slightly next week, with the main highlights including flash May PMIs and initial jobless claims for the May payrolls reference week. However we get a significant number of Fed speaker appearances including NY's Williams, Dallas's Logan, and Minneapolis's Kashkari.

 

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