The Waiting Is the Hardest Part
Good news. Core consumer prices were up just 0.1% in May from April. Annual core inflation was 2.8%. Both measures were better than Bloomberg estimates, and annual inflation remains near a multi-year low. (See the exhibit.)
It seems that tariff-related price increases aren’t having much of an impact on inflation. But just because it hasn’t happened yet doesn’t mean it won’t. In the months before tariffs took effect, businesses stockpiled imported inventories. Companies may have delayed passing along current price increases as they work down their cheaper, non-tariffed materials. Once those cheaper stores are depleted, they may be inclined to raise prices. Further, as it stands now, we reach the expiration of President Trump’s 90-day pause of his “Liberation Day” tariffs in July, which has the potential to rekindle higher tariffs. To be sure, tariff-related uncertainty remains.
Exhibit: Consumer Price Index, Change from a Year Earlier
Source: Labor Department, The Wall Street Journal, Clayton Wealth Partners.
The May inflation data isn’t likely to cause the Federal Reserve to change its wait-and-see stance. The Fed has made great progress bringing down inflation over the past few years, but annual inflation has remained well above its 2% target on its preferred inflation measure. Fed Chair Powell and his colleagues keenly want to avoid policy mistakes made in the late ’70s, when the Fed eased too much, too fast, only to see that era’s inflation reignite. Their perspective might change if the employment situation were deteriorating quickly, but it’s not: Nonfarm payroll gains have averaged 139,000 the past three months, about the same as a year ago. So, it’s all but certain the Fed will hold steady at its June meeting, and the market expects the Fed to stand pat at its July meeting, too.
Meanwhile, financial markets appear to be benefiting from the likelihood that the worst of policy uncertainty is behind us and an economy that remains resilient, albeit with growth slowing. As of this writing, the S&P 500 has reclaimed its uptrend and is within about 2% of its all-time high. At about 4.2%, the yield on the 10-year Treasury remains within a well-defined range. For now, we are fully allocated in client portfolios, with most maintaining a modest gold position.
Bullish
- U.S.-China trade tensions have cooled with a temporary slash in tariffs.
- The Fed has made good progress in reducing inflation since 2022.
- The most attractive yields for fixed income and cash in years.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Middle East conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.