Recession, reschmession

My favorite Prada slingbacks suffered a wardrobe misfunction as I negotiated the staircases at Chicago’s Navy Pier this week. Fortunately, no one in the audience appeared to notice. It was quite a respectable crowd, considering I was competing with seven other breakout sessions, and we were the first presenters of the day, after casino night. Next stop, Overland Park, Kansas, where my affable colleague gave me permission to wear my Ferragamo flats for our meetings there. No, I insisted, I need heels for confidence. He took me shopping (!), and then I promptly forgot to wear my new heels! No matter … confidence to spare! Investor confidence is returning more generally as well, with the American Association of Individual Investors still bearish but just barely. That setup of bulls rising but in the minority has historically produced strong forward returns. The Investors Intelligence sentiment reading turned bullish this week for the first time in months. Technicals favored the market, too. The so-called “de Graaf thrust” was triggered this week, whereby 20% of names made 20-day highs. This almost never takes place in a bear market. The fact that we’ve recovered half (actually, nearing the highs) of our 20% max drawdown implies seven chances in eight that we’ve seen the worst. Fundstrat observes that nearly half of S&P 500 names are above their 200-day moving averages—and yet many investors don’t feel the rally can be sustained. Are they on to something? Not if we avoid a recession. Speaking of which, 11% of large caps said tariffs impacted their results, with an average 7% drag on profit margins. Strategas estimates the tariff hit to revenue will be about $300 billion (half their previous estimate) and suggests this will lead to fewer downward earnings revisions and upside surprises.

The great de-escalation changes the equation for the Federal Reserve. Still, it may be some months before the data looks reliable again after the topsy-turvy events of the trade war. Perhaps we’ve seen the worst, but we’re just back to where we were—and with a weakened outlook. If tariffs are no longer intolerable, they’re far higher than they’ve been in decades—a weighted average of roughly 12 or 13% at the moment (up from 2.5% in 2024). At the moment. There’s been a 90-day pause on the worst of the China tariffs and a separate 90-day pause on everyone else. Then what? The market seems only ready for good news. Maybe the UK deal can serve as a model for a dignified retreat from the sterner tariff ambitions of early April. Should be an interesting summer! We sure could use a tax deal.

President Trump traveled to the Middle East, making some big deals. Meanwhile, lawmakers in Washington are stuck producing their “one, big, beautiful bill,” which will be passed through the onerous reconciliation process to avoid the likelihood of a Senate filibuster. The bill is expected to extend the tax cuts while providing capex incentives, among other measures. The net result should be a stimulus of about 1% of GDP. It will be another four-year bill, and thus a campaign issue in 2028. It’s expected to raise the deficit by 0.2% of GDP in the current fiscal year and 0.9% of GDP next fiscal year. Meanwhile, the federal courts are set to consider important elements of Trump’s agenda. The Supreme Court is announcing most of its verdicts for the year between now and the end of June. Among the questions on which the high court is set to rule: birthright citizenship and also the question of whether district court judges can issue nation-wide injunctions. Cases on the legality of the Liberation Day tariffs will be heard by the US Court of International Trade in New York. A very interesting summer ahead! In prepared remarks for the Thomas Laubach Research Conference in Washington, DC this week, Jerome Powell said "We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks." For his part, Trump said he’d set tariff rates for trading partners over the next two to three weeks, and that the administration would be sending letters telling people what “they’ll be paying to do business in the United States.” Ahh. But for the moment, stagflation, stagschmation. 

Positives

• Easing does it In April, both headline and core CPI inflation came in a bit lower than expected, rising 0.2%. Over the last three months, core CPI has climbed just 2.1% annualized. Supercore inflation came in at the lowest level in four years, suggesting overall price pressures for services are easing too. A big drop in food prices contributed to the benign reading. Eggs posted their largest drop since 1984. We saw another large drop in used car prices and airfares. Indeed, consumer prices were declining apace ahead of major increases in tariff rates. As to tariff-related price increases, household appliances have jumped sharply in recent months.
• Waiting and seeing The National Federation of Independent Business’ April Small Business Optimism Index declined a less-than-expected 1.6 points to 95.8, the second consecutive month below the 51-year average of 98. The Uncertainty Index decreased 4 points to 92, still far above the historical average of 68. A nod to tariff uncertainty, capital spending intentions cratered to historic lows. Still, a relatively high 34% of business owners reported job openings they could not fill, while the percentage planning to increase hiring over the next three months rose to a relatively normal reading of 13%. A net 15% of firms expect the economy to improve in the next six months, down from 52% in December, but within the range of the post-Great Recession expansion.
• Where tariffs were supposed to show up first The PPI components feeding into core PCE came in largely as expected, apart from weakness in finance categories that are correlated to equity markets on a lag. Investment advice and portfolio management declined 4.5% and 6.9% m/m, respectively. Given this week’s PPI and CPI data, core PCE is now expected to rise only slightly in April. Elsewhere, import prices rose 0.1% m/m in April, against consensus expectations for a 0.3% decline, but the airfares component that serves as source data for core PCE declined 1.7%

Negatives

• “Only Slightly” in lots of this week’s reports Industrial production was unchanged in April, just slightly weaker than consensus (+0.1% m/m). Also, the New York Fed's Empire State manufacturing index was little changed at a below-zero level in May, down 1.1 points to -9.2 (consensus -8.0), while the Philadelphia Fed's manufacturing survey remained in contraction (up 22.4 points to -4.0). Adjusted to ISM weighting, both indexes were subdued but edged above the 50 breakeven: 51.1 and 50.7 for the Empire State and the Philadelphia indexes, respectively. Also, headline retail sales edged up 0.1% m/m (to new all-time highs, you’re welcome), with a strong month for restaurants and bars helping to offset weakening in goods spending (consensus 0.0% m/m). Also, Q2's Senior Loan Officer Opinion Survey (SLOOS) showed that bank loans remained generally available, with only slightly tighter credit conditions for commercial and industrial loans while loan demand remained relatively moderate. Strategas’ bottom line—the “hard” economic numbers still do not indicate a US economy in distress.
• But sentiment is bad! Republicans joined the Democrats' and independents' angst in April’s University of Michigan consumer sentiment survey. The index dropped to 50.8 in April, the second-lowest reading on record, though the survey was conducted before the 90-day China tariff pause. April’s National Association of Home Builders housing market index surprisingly fell 6 m/m to 34, versus expectations of no change. Persistently high interest rates continue to deter buyers, even as homebuilders offer mortgage buydowns and price new homes roughly 3% below their peak, to clear inventory. As to construction, total April housing starts rose 1.6% m/m to 1,361k, just under the 1,364k consensus. But economically important single-unit starts fell 2.1% m/m, while multi-unit rose 10.7%. Permits fell 4.7% m/m to 1,412k, well short of the 1,450k expected.
• More empty seats may not actually be due to the economy The severe shortage of air traffic controllers has contributed to recent issues, this time at Newark International. While it should ideally have 50 controllers according to Bloomberg, the actual number is 22. And now 65% of consumers say they feel more nervous about flying considering recent incidents, according to a recent survey by the Points Guy, in partnership with the Harris Poll. A third of those surveyed admit their fear of flying has led them to change their travel plans; 22% took an alternative form of transportation and 11% canceled plans due to fear of flying. Adding insult to injury, all New Jersey Transit services are suspended as engineers went on strike, their first walkout in more than 40 years. 

What Else

Easier said Drug prices in many countries are significantly lower than what Americans pay, a widely known fact. Now Donald Trump, the seventh president to try to rectify this situation, has signed an executive order to force pharmaceutical manufacturers to sell to US patients at prices that match the lowest prices they are charging abroad and to enable manufacturers to sell directly, letting patients bypass retail pharmacies and pharmacy benefit managers. Fundstrat notes it’s not clear that the president or Congress has the authority to issue such an order. And the pharmaceutical industry will surely launch an exhaustive, deep-pocketed and long-lasting legal fight. Complicating matters, a 2021 study by Washington University found that 78% of the active pharmaceutical ingredients in the top 100 brand-name prescription treatments were made outside the US.

Oh, Canada Since the 1980s, Canada's goal in US free trade deals has been to stabilize trade based on transparency, culminating in the 1994 North American Free Trade Agreement. Canada supplies essential resources to the US, including oil, potash, electricity and some critical minerals, but Canada is much more trade-dependent than the US, with a Trade/GDP ratio of 67% in 2023 versus 25% for the US. The election of Mark Carney amid the ongoing US-Canada trade tensions has motivated Canada to reduce reliance on US exports. Soon the upcoming G7 meeting (June 15-17) will evidence Trump-Carney relations and implications for future trade negotiations. The US-Mexico-Canada Agreement is up for review in 2026, though both Trump and Carney have been noncommittal on whether the deal should be reworked.

Move over, Hollywood Bloomberg News reports that “AMC Entertainment Holdings Inc., the world’s largest cinema chain, will slash the price of a movie ticket in the US by half on Wednesdays in a bid to draw more people to theaters between weekends.” The company plans to start the discounts on July 9, in the middle of the summer blockbuster season. Meanwhile, India’s policymakers are turning to Bollywood and the broader creative sector to reignite growth, unveiling a $1 billion stimulus fund aimed at boosting investment in media, arts and entertainment. Prime Minister Modi is betting that India’s cultural economy can do more than entertain—it can grow the broader economy. “This isn’t just culture,” Modi said at India’s inaugural 2025 Creative Economy Summit, “it’s capital.”

Editor's note: No column next week, but Linda Duessel will return the week after.