Inflation Eases

Tariff headlines continued to pour in during the short holiday week, although their impact was relatively minor. On Friday, President Trump had recommended raising tariffs on the European Union to 50% beginning June 1 due to a lack of progress on negotiating trade deals. Before the start of trading on Tuesday, however, he had agreed to postpone the higher tariffs until July 9. On Wednesday, a federal trade court ruled that the President is not authorized to impose tariffs under the Emergency Economic Powers Act, adding to the uncertainty about future trade policy. The Trump administration was given ten days to make the necessary changes to comply with the ruling. On Friday, President Trump accused China of violating the preliminary trade agreement reached on May 12 with the U.S. in which the two countries suspended most tariffs on each other for 90 days.

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. In April, Core PCE was 2.5% higher than a year ago, down from an annual rate of increase of 2.7% last month, and the lowest level since March 2021. Progress toward the 2.0% target of the Fed has not been easy, and this desired level has not been achieved since February 2021. The big question is how large an impact higher tariffs will have on future inflation levels.

After five straight months of declines, the report on consumer confidence published by the Conference Board finally bounced back, mostly due to easing concerns about a damaging trade war. The index jumped to 98 in May, far above the consensus forecast of 86. Optimism increased significantly in many areas including employment prospects and the outlook for the stock market.

Week Ahead

Investors will continue to look for additional information about tariff policies. For economic reports, the ISM national manufacturing sector index will be released on Monday and the services sector index on Wednesday. The Trade Deficit will come out on Thursday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.

We would like to thank Peter Costakos and his partner, MBSQuoteline for their insightful information.

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