Hello, crypto enthusiasts and more! While we are watching the ups and downs of digital assets, something is happening in the traditional financial world that directly affects our portfolios. The last few days in the American markets have reminded me of some surreal film, where plot lines constantly contradict each other. And in the lead role of this blockbuster is not Bitcoin, but... Donald Trump's tariffs and the upcoming decision of the Fed on rates. Let's figure out what is going on.
Let's start with perhaps the most confusing. On the one hand, we have cheerful news from the labor market - American employment is holding up well, the latest report showed the addition of 177,000 jobs in April, with an unemployment rate of 4.2%. And then a surprise comes from the ISM services business activity index: it suddenly accelerated in April to 51.6%, unexpectedly surpassing forecasts of 50.6%. It would seem that the economy feels good, and the Fed might consider the next step. But the devil, as always, is in the details and... tariffs.
You see, against the backdrop of these positive signals, rather gloomy shadows of protectionist policies loom. Trump is not just keeping the intrigue around his trade plans, but is throwing fresh logs onto the fire - like a new 100% tariff on foreign films. And, it seems, he does not plan to meet with Xi Jinping yet, which makes the prospects for a trade deal even more elusive. All this tariff uncertainty is not just words: it has already echoed with a GDP contraction in the first quarter of 0.3% year-on-year, a strange spike in imports (business rushed to import goods before tariffs were imposed), and a subsequent collapse in volumes at ports. Plus, according to other business activity research (S&P Global indices), the picture looks less rosy: their Services PMI was revised down to 50.8%, showing the slowest growth in 17 months, and business sentiment is deteriorating, reaching a low for two and a half years. Foreign demand has indeed dropped to its lowest since the end of 2022. So, we have this economic salad: somewhere it’s thick, somewhere it’s empty, and the overall taste is quite alarming.
Markets are responding to this 'salad' accordingly - with mild panic and uncertainty. The yield on 10-year U.S. government bonds has risen, reaching levels of 4.3-4.35%. Why? Partially, this reflects inflation concerns, reinforced by the same business activity reports where companies are actively raising their selling prices, at the fastest pace since January (according to S&P Global) or even since February 2023 (according to ISM), citing rising costs due to tariffs. Households' inflation expectations for the year ahead, by the way, reached 6.7% in April. That is, tariffs seem to be meant to protect the domestic market, but in fact, they are driving prices up and hitting consumers. Funny, right? Against this backdrop, American stocks began the week with a decline, breaking their impressive winning streak. The largest tech giants are also in the red, except for Alphabet and almost unchanged Microsoft. The dollar, by the way, also feels unsure, hovering below the 99.7 mark, as investors look at other markets, such as the more robust Eurozone.
And so in this bubbling mixture of contradictory data and tariff horror stories, we approach the main event of the week - the Fed meeting on May 6-7 and Jerome Powell's press conference on Wednesday, May 7. Given all this confusion, most analysts agree: the Fed is likely to keep rates unchanged - the probability of this is estimated at more than 95%. Jerome Powell and other Fed representatives have lately made it clear that they need greater clarity regarding the impact of tariffs on the economy before changing course. They acknowledge that tariffs will likely lead to a combination of higher inflation and slower growth, creating a 'difficult scenario' for fulfilling the Fed's dual mandate (price stability and maximum employment). Yes, futures on rates still somehow imply up to 4-5 cuts this year (apparently believing in a scenario of economic slowdown under the weight of tariffs), but Powell and his team have made it clear: as long as inflation is not fully under control, they will not rush. And the latest data on prices and costs hint that this control has not yet been fully established.
So what is the bottom line? The American economy is sending mixed signals: some sectors are demonstrating resilience (labor market, ISM services), while others are clearly suffering from the uncertainty of trade policy and rising costs due to tariffs (GDP, S&P Global PMI, business sentiment). This turbulence complicates the Fed's work and keeps markets on edge. Jerome Powell is expected to take a wait-and-see approach, reaffirming his commitment to fighting inflation. For us, participants in the crypto market, this is an important reminder that the macroeconomic backdrop remains complex and uncertain. Keep an eye on the news from Washington and remember that in the world of finance, just like in a good detective story, the most interesting twists often happen when you least expect them. And sometimes tariffs can be more unpredictable than any cryptocurrency correction.