U.S. CPI readings for April were a touch lighter than forecasted, with U.S. headline CPI up +0.2% month-over-month (MoM) and up +2.3% year-over-year (YoY) versus consensus expectations for +0.3% and +2.4%, respectively. Core CPI also decelerated in the month, up +0.1% MoM and up +2.8% YoY while economists were expecting +0.3% and +3.0%, respectively. These YoY prints are back to their early 2021 levels before the significant surge in inflation that saw the Fed react swiftly and aggressively to raise interest rates.
Driving the prints were a number of factors. Food prices were lower, off -0.1% in the month, driven by a -0.4% decline in groceries – its sharpest move since September of 2020. Despite a move lower in gasoline, energy prices were higher by +0.7% on a spike in natural gas and electricity costs. Airfares were lower, down -2.8%, for the second month in a row, reflecting the slower demand cited by companies in their most recent earnings reports. Shelter remains sticky, up +0.3% MoM and +3.6% YoY, as do motor vehicle insurance and medical care services, up +0.6% and +0.5% MoM, respectively. Interestingly, the only area of the economy that might be reflecting the recent tariffs is household furnishings & operations, up +1.0% MoM – even apparel was down -0.2% MoM. Admittedly, retailers are likely still moving through inventory built up ahead of April 2nd and recent history shows that supply related goods inflation can take several months to materialize.
Equity markets were initially higher on the release but have given some of that back in the session, while U.S. dollar and yields are lower. While certainly a good print, today’s news is overshadowed by a flurry of tariff news over the past two weeks, starting first with the announcement of a deal framework between the U.S. and the U.K. that provided a baseline for further negotiations. While the U.S.-U.K. deal maintained the 10% baseline tariff, it opened the door to greater negotiation of sectoral tariffs and appeared to set the tone that the Trump Administration is particularly interested in improving market access for U.S. producers. This was followed by yesterday’s announcement of a significant decrease, at least in the short-term, on tariffs between the U.S. and China. While there was admittedly a lot riding on the meetings in Geneva this past weekend between U.S. and China officials, the outcome was more positive than expected in terms of de-escalating tariff tensions.
The two countries announced a 90-day reduction in tariff rates, with the U.S. reducing the general tariff rate from 145% to 30% - 20% fentanyl plus 10% reciprocal – while the Chinese committed to a 10% levy. Admittedly, the 30% are on top of the pre-existing Chinese tariffs and sectoral tariffs are still in play as well, particularly in industries that the Trump Administration believes are susceptible to dumping. However, the short-term decrease to an average weighted tariff rate of 14% is important, as it likely spurs normalization in terms of shipments, alleviating the supply chain challenges that U.S. consumers were likely to feel in the coming weeks.
With at least modest inflationary impacts still a risk, but the threat of a short-term, meaningful downdraft in economic activity mitigated in part by the delays, our view is that the Fed has been given the time it needs to see if there will eventually be a spillover from dour soft data to hard data. However, continued evidence of disinflation coupled with slower economic growth could reignite calls that the Fed is too restrictive and could press the timeline forward from September to July should subdued business confidence translate to even lower hiring and a pullback in capital expenditure. Worth watching will be the bond market’s reaction to the combination of a potentially more flexible Fed and an extended/expanded TCJA, as it will create friction and, frankly, potentially some volatility in yields which have proven to be a continued impediment to investment, particularly residential investment, to start the year. We advise our clients to take advantage of any volatility in the coming weeks to continue to move towards longer-term strategic allocations, particularly for those clients who are under-allocated to private markets and/or have large cash positions.