Last week, the Federal Open Market Committee (FOMC) met and decided they want to defy: (1) President Trump, (2) Treasury Secretary Bessent, (3) deflationary forces, (4) lower Treasury yields, (5) surging new unemployment claims, and (6) collapsing global interest rates by holding key interest rates steady. That doesn’t include: (7) the cost of servicing a soaring national debt, and (8) a suffering real estate market, so that home builders have to discount homes to sell them. Deflation is spreading, and the Fed can’t see it.
Wednesday’s FOMC statement said, “Inflation remains somewhat elevated.” This is perplexing since all three inflation measures – the CPI, PPI and PCE – are trending lower and, except for gold, commodity prices are falling. I find it amazing that the Fed doesn’t notice the lowest crude oil prices in four years.
Every economist is trained to fight deflation, so the fact that Fed Chairman Powell has been anticipating inflation that may not materialize is frankly very scary.
Here are the most important market news items and what this news means:
- The stock market staged a big relief rally after Treasury Secretary Scott Bessent announced a 90-day reduction in tariffs between China and the U.S. It will be interesting to see how these 90-day tariff reductions impact trade, since there is an inventory glut after trade “dumping” in the first quarter. China’s manufacturing output continues to sputter, so the U.S. still has leverage in these ongoing trade negotiations.
- The U.S. dollar resurged in the wake of the latest tariff news. I remain convinced that a strong U.S. dollar will help to offset the 10% baseline tariffs that the Trump Administration imposed on virtually all imported goods. Of course, on top of the 10% baseline tariffs, there are reciprocal tariffs that can be imposed on other countries. However, as President Trump pointed out with British Prime Minister Starmer, there are no reciprocal tariffs being imposed on trade between Britain and the U.S. The favorable British deal was also intended to put pressure on the European Union, which has much higher tariffs on U.S. goods.
- Interestingly, Treasury Secretary Scott Bessent said that the European Union (EU) suffers from a “collective action problem” that is hindering tariff negotiations. Specifically, Bessent said, “My personal belief is Europe may have a collective action problem; that the Italians want something that’s different than the French. But I’m sure at the end of the day, we will reach a satisfactory conclusion.” In other words, Brussels is having a difficult time reaching a consensus within the EU.
- According to Commerce Secretary Howard Lutnick, inflation is not expected to re-ignite. Specifically, Lutnick said “Don’t buy the silly arguments that the U.S. consumer pays,” he added “Businesses — their job is to try to sell to the American consumer, and domestically produced products are not going to have that tariff.” Lutnick also said “Look, we have 25 percent tariffs that were set on under President Trump’s first term,” and pointed out that “No consumers in America sit here complaining about those tariffs.”
- The April Consumer Price Index (CPI) was the lowest annual inflation pace for the CPI since February 2021, and wonderful news for potential Fed interest rate cuts. On Tuesday, the Labor Department announced that the CPI rose 0.2% in April, which was below economists’ consensus estimate of a 0.3% increase. Food prices declined 0.1% in April, while energy prices rose 0.7%, despite a 0.1% decline in gasoline prices. Excluding food and energy, the core CPI rose 0.2%, which was below economists’ consensus estimate of a 0.3% increase. In the past 12 months, the CPI and core CPI rose 2.3% and 2.8%, respectively. Shelter costs (owners’ equivalent rent) rose 0.3% and accounted for half of the CPI increase.
- China’s National Bureau of Statistics reported that consumer prices declined 0.1% in April, which represents the third straight monthly decline. Producer prices have declined 2.7% in the past 12 months, so deflation persists in China. The impact of higher tariffs is not being fully realized in the April data, so China’s deflationary spiral is expected to get worse.
- On President Trump’s trip to Saudi Arabia, where he brought multiple high-profile business leaders like Elon Musk and Mark Zuckerberg, Saudi Crown Prince Mohammed bin Salman signed on Tuesday a broad economic partnership strategy and a series of commercial agreements that the White House said amounted to more than $600 billion. I noticed that Palantir Technologies CEO Alex Karp made the trip on Air Force One, so I expect new defense deals will also soon be announced.
Overall, the bearishness we witnessed after the staggering tariffs proposed on “Liberation Day” has turned out to be one of the greatest buy-the-dip opportunities ever. With huge amounts of investment funds still on the sidelines, the fear of missing out should bring new buyers, especially if progress continues on the tariff front and the inflation impact is less than feared.
