The S&P 500 is down roughly 10% from its record high on February 19. Considering Trump's Tariff Turmoil (TTT), that's not too bad. Also recall all the angst unleashed when the 10-year US Treasury bond yield spiked from 4.00% to 4.50% right after President Donald Trump announced his "Liberation Day" reciprocal tariffs. Now it is back down to 4.20% (chart). The stock and bond markets may be getting support from expectations that the Fed may ease soon.
The S&P 500 is down roughly 10% from its record high on February 19. Considering Trump's Tariff Turmoil (TTT), that's not too bad. Also recall all the angst unleashed when the 10-year US Treasury bond yield spiked from 4.00% to 4.50% right after President Donald Trump announced his "Liberation Day" reciprocal tariffs. Now it is back down to 4.20% (chart). The stock and bond markets may be getting support from expectations that the Fed may ease soon.
Federal funds rate (FFR) futures show that tariff-related growth fears are real, and the Fed will likely look through tariff-related price increases and cut the FFR. Futures suggest that the FFR will be cut from 4.33% to 3.50% by year-end, and continue to be cut through the first half of next year down close to 3.0% (chart).
Meanwhile, the long-end of the yield curve, i.e., 10- and 30-year Treasuries, remains relatively high. At around 4.20% and 4.70%, respectively, longer-term Treasury yields reflect that investors believe the war on inflation hasn't been won, and inflation may be persistent, with little sign that Washington is willing to ease off the debt accelerator.
That's also reflected in the yield-curve spread between 10-year and 2-year Treasuries. It has has steepened to +53bps (and briefly to +65bps last week), its loftiest levels in more than three years (chart).
The Dallas Fed's April M-PMI had a stagflationary smell today. New orders plummeted from flat to -20, and the general business activity index fell 20 points to -35.8, its lowest since May 2020. Meanwhile, prices paid for inputs jumped to multiyear highs. The average of the business conditions indexes of the regional business surveys conducted by five of the 12 Fed district banks plunged in April and suggests that the national M-PMI did the same (chart).
At the same time, the averages of the regional prices-paid and prices-received indexes jumped in March and April (chart).
But for all the inflation fears, March's PCED inflation is unlikely to be very hot when it is reported on Wednesday. Both the CPI and PPI were fairly cool, and headline and core PCED are likely to be around 0.0% and 0.1% m/m, respectively, according to the Cleveland Fed's Inflation Nowcasting. That would put these two at 2.2% and 2.5% y/y, within shooting distance of the Fed's 2.0% target (chart).
It may take until May or June inflation data for price pressures to start showing up. Container shipments are falling, and US ports are showing less and less activity. Companies also built up inventories in Q1 to get ahead of tariffs, which will take time to run down. Import price inflation, which does not include tariffs, is still relatively subdued (chart). The next few months should be interesting. The price of gold rose $62 to $3,361 an ounce today.
