Life moves pretty fast

Not to be outdone, Trump tweeted Thursday, Powell’s “termination can’t come fast enough.” The markets found Powell’s mid-week comments hawkish, spurring worries about the Fed’s independence and the anticipated Fed Put. This week I traveled through the Detroit suburbs, and the opinions were strong and disparate. From an advisor, “I still believe in the maniac.” From a retired Ford employee after my AI presentation sharing excitement for biopharma advances, “You’ll have to throw those statistics out, research has been DOGE’d and the US will fall behind the world.” My survey of EV owners at two events yielded just two raised hands. (Should’ve read the rooms.) In general, advisors’ phones aren’t ringing off the hook with panicked investors, though I did hear “talking off the ledge” a few times. “My client wants to ‘sell everything and leave the country.’” From another advisor, “They’ll take my Obamacare away.” Is the bottom in? The S&P 500 fell to 4,835 on April 7 but is now up roughly 500 points from there. The 200-week moving average of 4,675 serves as a support should things deteriorate sharply once again. The S&P 500’s 50-day moving average crossed below its 200-day this week, something that had already happened to more than half of the stocks within the index. As for the selloff in Treasurys that prompted so much of the worrying, Treasury Secretary Bessent said he sees no evidence that it derived from foreign governments dumping their US bonds. Over in equities, Bank of America’s fund manager survey shows sentiment at its most pessimistic in three decades, an outlook that isn’t yet reflected in allocation levels. As well, retail investors have bought $21 billion on net since April 2, almost half of that in the last week, which is well above average. Hmm.

Did Trump blink first with China in removing the tariff on electronics? Maybe. It’s hard to see negotiations with China starting for another month at least, as the White House is busy trying to cut deals with allies first. When it comes time, as ISI points out, the Oval Office scene with Zelensky suggests Xi Jinping is unlikely to travel to Washington for the signing. In the meantime, as the Fed looks to gauge inflation expectations, it will have to consider the source carefully. Household expectations have jumped, but inflation expectations implied by market measures have not. Strategas’ “Common Man CPI” tracks only the essentials such as food, clothing, shelter, etc. It has exceeded the consumer price index nearly 90% of the time in the past three years. Right now, it has fallen to 2.6% y/y versus wages at 3.8% y/y. But, Yardeni says, the tariffs are more of a risk to growth than to price stability. Months of uncertainty ahead will not likely quell “stagflation” fears. Importers appear to be working down the inventories they built up ahead of tariffs, and anecdotally it appears that they’re starting to cancel existing orders. While it may not imply recession per se, it does mean things will slow down. And now currencies, bonds and other supposedly stable assets are behaving strangely. The yield spread between short-term Treasurys and most comparable foreign sovereigns has risen even as the dollar has fallen, the opposite of the typical relationship. The dollar index is down 4% since April 2; in 2018-19, by contrast, the dollar rose, offsetting some of the impact of Trump’s China tariffs. And earnings? It’s likely that the worst is priced in—unless we get a recession. The current market level is consistent with a bit of an earnings drawdown this year followed by a rebound next year.

The Trump administration has revealed itself to have a put. The exemption from punitive tariffs on cell phones, semiconductors and other electronic items is bullish for now. Supposing that these electronics might be eventually subject to a sector tariff rate of, say, 25% (as with cars, car parts, aluminum and steel), getting them out of a high China tariff rate and into a less lofty global sector rate could be good for importers of Chinese-made cell phones and other devices. But this complicates the endgame of the China negotiations. The same can be said of current negotiations with Japan. More than half of Japan’s exports to the US are in areas covered by the sectoral tariffs, especially autos and auto parts. They won’t want to cut a deal with Trump on the rest of their trade if it leaves their sectoral exports exposed to steep tariffs. One good sign is that the Chinese said they were willing to negotiate once the Trump administration names a lead negotiator. More good news: Deregulation should become clearer over the coming months, with more than 400 agencies starting to reduce red tape. And, a new budget package is making its way through the reconciliation process. Expected to pass in July, it should be a positive catalyst unless bond vigilantes take alarm at deficits. To finish Ferris Bueller’s famous line, “If you don't stop and look around once in a while, you could miss it."

Positives

• So far so good Industrial production declined 0.3% m/m in March, meeting expectations. The moderation reflected a strong 5.8% decline in utilities output, likely driven by warmer than usual temperatures. Manufacturing production was up 0.3%, in line with consensus. Industrial production is up 1.4% y/y and manufacturing production is up 1%, suggesting industrial activity remained resilient last month, with little obvious drag from uncertainty. Light vehicle sales advanced to a pace not seen since prior to the United Auto Workers strike, as auto manufacturers accumulated inventories in advance of tariffs.
• Benign trade inflation, although Import prices fell 0.1% in March on lower energy prices (-1.5% m/m), below consensus expectations for no change. Note that import prices do not include tariffs. Import prices for consumer goods ex-autos fell 0.2%, the fourth consecutive month with a negative monthly change (again, before tariffs). Import prices of motor vehicles slipped 0.1% m/m, the fifth consecutive decline. Over the past year, headline import prices were up 0.9% in March, after a 2.2% increase in February. Export prices were unchanged.
• I’m depressed, let’s go to the mall Retail and food services sales rose an expected 1.4% m/m in March, largely due to a 5.3% rise in auto sales; ex-autos, sales rose a more muted 0.5%. Consumers likely purchased cars ahead of tariffs, but still, they’re willing to spend. And building materials and garden equipment sales rose 3.3%; while sporting goods, hobby, book and music store sales were up 2.4% and sales at food and drinking places rose 1.8%.

Negatives

• Since we’re certainly not house shopping right now April’s National Association of Home Builders Housing Market Index unexpectedly rose +1 m/m to 40, beating the consensus estimate of 38. Unfortunately, their outlook fell to a 17-month low, as 60% of builders reported suppliers have already raised prices of materials because of tariffs, or they’ve announced increases. Housing starts fell 170K to 1324K in March, well below consensus (1420K). Total permits were up 23K to 1482K vs consensus (1450K). However, the most forward-looking part of the report, single-family permits, slipped 20K in March to 978K and the improvement in total reflected a 43K rise in multi-family permits to 504K.
• Everyone’s talking about tariffs, and now jobs? The New York Fed's March Survey of Consumer Expectations one-year ahead inflation expectations rose by 0.5% to 3.6%, the most significant monthly increase in two years. Medium and longer-term inflation expectations remained anchored, with three-year expectations holding steady at 3% and five-year expectations down slightly to 2.9%. This stability in longer-term expectations is encouraging, echoing the Fed's emphasis on anchoring these measures. Beyond inflation, the probability of unemployment jumped substantially, reaching 44%, its highest point since April 2020.
• Not a good start to regional manufacturing reports The New York Fed's Empire State manufacturing general business conditions index rose 11.9 points to a still-weak -8.1 in April, above consensus (-13.5). Meanwhile, the Philadelphia Fed's manufacturing survey's general business conditions index fell 39 points to -26.4 in April vs consensus (2.2), or 43.6 in ISM-adjusted terms. The index for shipments fell 11 points to -9.1, and for new orders it dropped 42.9 points to -34.2, the lowest reading since April 2020.

What Else

Americans support manufacturing coming back, unless Thirty years ago, the US represented 100% of the manufacturing capacity of semiconductors; now it’s 8%, a concern for our national security. But a 2024 Cato Institute survey on trade shows 80% of Americans support reshoring, but only 20% believe they would be better off with a manufacturing job. Furthermore, 62% support adding tariffs to goods such as blue jeans to boost US production and employment with no mention of price. But if those jeans become $10 more expensive, only 34% still support the tax.

Better figure this out by Christmas! Eighty percent of US toys are made in China, and the 125% tariff on them will make for a much more expensive holiday season. The owner of the Christmas Loft in New Hampshire said the retailer will absorb some of the tariff cost, but expects they’ll raise prices by at least 50%.

I’ve got a beach in my backyard Yardeni Research figures big-ticket trips are likely one of the first things households will cut. Spending on airlines and hotels reached a record-high annual rate of $368.2 billion in February, but CPI airline fares fell 5.3% m/m in March. Perhaps demand is already dropping off. But Yardeni adds that to see the degree of inflation shock consumer surveys suggest they’re worried about, an oil price shock would likely be necessary.