#TradeWarEases #Fed #USeconomy
Hello everyone! Let's break down what has been happening in the American financial space, relying on the latest data. The week has been eventful, and the markets seem to have decided to celebrate, despite some not-so-rosy economic signals.
Indexes up, mood in the positive (at first glance)
Let's start with the good news: major US stock indices finished the past week confidently in the green. The Dow Jones, S&P 500, and Nasdaq showed solid weekly gains, with Nasdaq even demonstrating an impressive leap. The S&P 500 closed the week with a fifth consecutive day of growth, returning to positive territory for the year and now being just 4% off its all-time high. The Russell 2000, a barometer of 'small' companies, also reached a 7-week high.
Individual stocks also did not disappoint. Walt Disney, Home Depot, Boston Scientific, Costco Wholesale, ADP, BlackRock – many reached multi-week peaks. And Nvidia seems to have decided to break all records for growth, adding more than 30% in a month and reaching an 11-week high. The technology sector, in general, was the engine of growth, although there were some minor downturns among individual giants.
Two pillars of the current rally: Trump and the Fed
What drives this optimism? In my opinion, two main factors:
Tariff truce: Announcement of a 90-day 'pause' in the trade war between the US and China was a powerful positive signal. Markets can't stand uncertainty, and suddenly – bam! – a temporary truce. This immediately reduced the level of tension and improved investor sentiment, causing a resurgence in market risk appetite. As they say, a bad peace is better than a good quarrel, especially for the global economy.
Hopes for the Fed: And here's where it gets interesting. Paradoxically, the weak economic data released last week were perceived by the market as... positive! Why? Because they heightened expectations that the Federal Reserve would be forced to start cutting interest rates, possibly even twice by the end of the year.
Consider this: inflation (both consumer and producer) turned out to be lower than expected. Retail sales were 'soft'. Housing market data also did not impress – building permits fell more than expected, and while the number of housing starts increased, it did not reach consensus. All this points to a possible economic slowdown. And, according to market logic, an economic slowdown gives the Fed reason to ease monetary policy.
A spoonful of tar: The consumer is in a minor key, inflation is in the stratosphere
But, as I said, the picture is not black and white. Against the backdrop of market euphoria, the American consumer seems to be feeling unwell. The University of Michigan's Consumer Confidence Index plummeted to 50.8 – the second lowest reading in the history of the survey!
The main reasons for consumer pessimism are rising inflation expectations and, strangely enough, renewed concerns over tariffs. Yes, there is a truce, but the topic of tariffs still hangs in the air and weighs on sentiments.
The most alarming thing is that inflation expectations for the year ahead have soared to 7.3%, setting a new record since 1981! Long-term expectations (for 5 years) have also risen to 4.6%. This is a serious challenge for the Fed. On one hand, weak data screams: "Lower rates!", on the other – rising inflation expectations whisper: "Be tougher!". A classic dilemma.
Add to this the unexpected rise in import and export prices in April, despite tariffs. This may indicate that companies are trying to pass on costs to the end consumer, which, of course, does not help in the fight against inflation.
Capital flows, yields fall
Against this backdrop, in March there was a second consecutive month of net capital inflow into the US ($254.3 billion), mainly due to private foreign investors actively buying US long-term securities. This shows that, despite internal problems, American assets remain attractive to global capital.
In the bond market, the yield on 10-year US Treasury bonds fell to 4.4% (down from a recent 4.55%). This is a direct reflection of expectations for Fed rate cuts. When rates go down, current bonds with higher yields become more valuable.
What's ahead? Looking across the ocean and at the Fed
The upcoming week in the US will be relatively calm in terms of super-important macroeconomic releases, but attention will be focused on the speeches of Fed representatives – every word will be analyzed under a microscope for hints about future monetary policy. By the way, the schedule of speeches is quite packed:
Monday (UTC+8): President of the New York Fed John Williams (05:20), President of the Atlanta Fed Raphael Bostic (20:30), Fed Vice Chairman Jefferson and President of the New York Fed Williams again (20:45).
Tuesday (UTC+8): President of the Dallas Fed Lorie Logan (01:15), President of the Atlanta Fed Bostic (21:00), President of the Richmond Fed Thomas Barkin (21:00).
Wednesday (UTC+8): President of the St. Louis Fed James Bullard (voting member of the FOMC in 2025) will discuss the economic forecast and monetary policy (01:00), President of the Atlanta Fed Bostic will hold a meeting with the Presidents of the Cleveland Fed (Loretta Mester) and San Francisco Fed (Mary Daly) (07:00).
Thursday (UTC+8): President of the Richmond Fed Barkin at the 'Fed Listens' event (00:00), Data on initial jobless claims for the week ending May 17 will be released (20:30), Preliminary S&P Global Manufacturing and Services PMI indices for May (21:45).
Friday (UTC+8): President of the New York Fed Williams with a keynote speech at a seminar on implementing monetary policy (02:00).
Traders will be particularly attentive to the preliminary PMI data for May, as it may hint at an improvement in business sentiment following the trade agreement with China. But the main thing is that everyone is waiting for clarity from Fed officials: what is currently the priority – supporting economic growth or combating inflation after the trade news?
An important point: on Friday, May 16, the rating agency Moody's downgraded the US credit rating for the first time since 1919 from the highest level of 'Aaa' to 'Aa1'. This decision was motivated by rising national debt, high interest payments, and a lack of effective measures to reduce the budget deficit. Moody's became the last of the three major rating agencies to downgrade the US (after S&P in 2011 and Fitch in 2023). The agency forecasts further growth of the deficit and national debt, with debt servicing potentially consuming up to 30% of revenues by 2035. However, Moody's emphasized that this does not reflect a decrease in confidence in US institutions or the foundations of the Fed's monetary policy, noting the country's exceptional credit advantages, including the role of the dollar as a global reserve currency. The downgrade sparked criticism, especially from those close to Donald Trump. This event could certainly cause significant volatility in the markets at the beginning of the week.
Globally, the week promises to be more eventful, especially regarding data from China (including interest rate decision!), Japan, Germany, the UK, and other countries. Global PMIs will also be in focus.
In summary
The current situation in the American markets is a fragile balance. Optimism is fueled by hopes for a trade truce and a softening of the Fed's policy, prompted by weak economic data. But beneath the surface, alarming signals lurk: sharply fallen consumer confidence, persistently high inflation expectations, and now – a downgrade of the US credit rating by Moody's.
For investors, this means one thing: stay vigilant. Markets can change direction quickly, especially when there are such contradictory signals. Keep an eye on the Fed (their speeches will be critically important next week!), on new data (especially PMI and jobless claims), and of course, on how the market reacts to the US rating downgrade. And remember, even in a rising market, there is always room for surprises.
Talk to you later!
