Economic data has been resilient in the face of enormous tariffs being levied.  The rapid de-escalation, the multiple meetings and offers, some (limited) trade deals and 90-day suspensions of the reciprocal tariffs has meant that the global economy continues to operate, with so far limited economic damage visible.

The impact of tariffs was seen in the expectation element of survey data, which weakened precipitously, but has since begun to recover.  No evidence can yet be seen in hard data.  While this will take longer, it is something of a surprise that there is no visible effect at all yet.  In fact, despite the expectations of many commentators that the impact of the higher tariffs should be feeding through to higher inflation data by now, inflation has continued to drift lower, not higher.

US

Continued resilience in economic data has helped to soothe market fears of large dislocations in the economy driven by tight supply chains, low inventory levels and enormously high tariffs.  It is likely that the rapid de-escalation has prevented this.  The labour market has continued to add jobs, at a pace that is seen as consistent with trend growth. One caveat to this is that every data point so far this year has been subsequently revised lower, and it is likely that benchmark revisions will show a weaker labour market than the monthly reports are suggesting.  But the broad spectrum of labour market indicators is suggestive of an employment market that is reasonably healthy and has returned to balance.

Inflation data continues to moderate – indeed, almost all of the recent monthly increases in prices can be attributed to the “core services” category, most of which, in turn, is shelter costs.  Further up the supply chain, producer price inflation also remains moderate, which means the Fed’s main indicator, core PCE inflation, is close to their target.

The combination of potentially understated weakness in the labour market, continued progress on inflation and the difficulty in extrapolating economic trends from the (likely) very noisy data over the next few months means the case for insurance cuts from the Federal Reserve is quite strong.  However, Chair Powell has been consistent in his message from the May press conference that policy is in a good place and there is no hurry for the Fed to act.

Europe

The ECB cut rates again, although the commentary that accompanied the rate cut this month was slightly hawkish (compared to the quite dovish commentary which accompanied the prior rate cut in April).  While the data has bounced a little, and expectations regarding the German fiscal stimulus plan are high, it seems a little premature for the ECB to begin signalling an end to rate cuts, given the strength of the euro, the underlying weakness in economic data, continued progress on inflation and the ever-present threat of tariffs.  This latter is particularly important for the Eurozone economy, dependant as it is on global trade.  Indeed, markets are still pricing in at least one more rate cut before the year is out.

China

Ongoing trade concerns mean the economic picture remains clouded.  Authorities have made several tweaks to policy over the last year, the totality of which should draw a line under the weakness of the last few years.  This has seen the credit impulse and lead indicators bounce, although most recent data did show a small drift backwards in these key indicators.  Tariffs, despite the ongoing talks and de-escalation we have seen, remain very high, and will likely constrain growth until more reasonable levels are agreed on.

This Is A Marketing Communication