#TradeWarEases #USeconomy #TrumpTariffs #Fed

Financial markets in the U.S. once again experienced volatility. Last week ended amid new tariff threats from President Donald Trump, which led to a drop in indexes and complicated the position of the Federal Reserve. At the same time, the housing sector demonstrated unexpected resilience. Let’s take a look at the details.

Trade wars: old songs in a new style

Friday was the day when markets once again felt the taste of tariff policy. The DJIA index fell by 0.61%, the S&P 500 dropped by 0.6%, and the Nasdaq 100 decreased by 0.9%. These changes reflect investors' concerns about the escalation of the trade conflict.

First of all, Apple came under fire. The president demanded that all iPhones sold in the U.S. be produced domestically, threatening a 25% tariff otherwise. Apple’s shares immediately plummeted by 3%, and the company's market value fell below $3 trillion. As noted by Josh Teitelbaum from Akin, Trump has mechanisms to fulfill this threat, especially considering the investigation into national security threats related to key technologies and semiconductors. For Apple, which primarily manufactures its smartphones in China and India, this is a serious challenge.

Secondly, Trump proposed to introduce a 50% tariff on all imports from the European Union starting June 1. The reason? Negotiations with the bloc, he said, have "reached a dead end" and "lead nowhere." This is not just a trade threat, but a potential blow to transatlantic economic ties that have only begun to recover. Experts, such as Andy Abbott from Atlantic Container Line, warn: Europe is not Asia, which mainly supplies consumer goods. The EU is a key source of industrial goods for American manufacturers. Implementing such tariffs would "boomerang," making American goods more expensive and potentially nullifying efforts to bring production back to the U.S.

Timothy Brightbill from Wiley called the situation "dangerous," emphasizing that the EU is likely to respond with mirror measures, leading to further escalation. Dan Anthony from Trade Partnership Worldwide called the 50% tariff "a huge, costly tax hike" that will affect every state, increasing tariff rates by 20-200 times depending on the imported products.

The week ended negatively for the markets: the S&P 500 lost 2%, DJIA – 2.2%, and Nasdaq – 1.6%. This occurred after the markets had just begun to recover from previous trading ceasefires.

The Fed: between a rock and a hard place – a challenge for monetary policy

Against the backdrop of tariff battles, the Federal Reserve has also entered the fray. Chicago Fed President Austan Goolsbee stated on Friday that Trump's recent tariff threats complicated monetary policy and likely delayed changes in interest rates.

Essentially, the Fed is currently in a "wait-and-see" mode. Goolsbee noted that the threshold for any rate actions has become higher while there is no clarity in trade policy. His main concern is the "stagflationary impact" of tariffs, that is, a combination of economic stagnation and high inflation. This is the "worst situation for a central bank," Goolsbee admitted. Central bankers usually try not to interfere in fiscal and trade policy matters, but they are forced to analyze their consequences.

The bond market reacted to the uncertainty with a "flight to quality." The yield on Treasury bonds fell: 30-year bonds to 5.031% (down 3 basis points), and 10-year bonds to 4.509% (down 4 basis points). This indicates that investors were actively buying bonds, considering them a safer asset in uncertain conditions. Earlier in the week, yields had risen due to concerns about the U.S. budget deficit and following the downgrade of the country's credit rating by Moody's. As noted by Peter Bookvar, Chief Investment Officer at Bleakley Financial Group, "capitalism works best when left alone... Unfortunately, we constantly stray from this basic economic concept, applying a top-down forceful approach."

Goolsbee, who is a voting member of the Federal Open Market Committee (FOMC), still hopes for long-term economic growth and interest rate cuts in the future. However, as he himself stated, "I don't even like to slightly tie my hands at the next meeting." The next FOMC meeting, where economic forecasts will be updated, will take place on June 17-18. Markets are currently anticipating two rate cuts this year, but not before September.

Housing market: unexpected growth

Against the backdrop of market troubles, one unexpectedly positive signal emerged: sales of new single-family homes in the U.S. rose by 10.9% compared to the previous month, reaching 743,000 units on an annual basis. This is the sharpest increase since August 2022.

It is important to understand that this surge is likely not a sign of overall economic prosperity. It is rather a result of developers’ efforts to offer various incentives to offset high mortgage rates and housing affordability issues in the secondary market. That is, it is a local improvement, not a universal breakthrough.

What’s next? A fragile balance

The upcoming week promises to be no less tense. Uncertainty surrounding Trump’s trade policy will continue to dominate. All eyes will be on comments from Fed officials and the FOMC meeting minutes.

We are awaiting a cascade of important economic data from the U.S.: personal income and spending, PCE price indexes (a key inflation indicator for the Fed), durable goods orders, goods trade balance, and the second estimate of GDP growth for the first quarter. This data will be very important for understanding the real state of the American economy.

Important events are also expected on the international stage: monetary policy decisions from South Korea and New Zealand, inflation data from France, Spain, Italy, and Germany, as well as GDP data for the first quarter from Turkey, India, Brazil, and Canada.

The U.S. economy is currently in a state of fragile equilibrium. On one hand, there is an aggressive trade policy threatening global ties and carrying stagflation risks. On the other hand, there are local successes, such as in the housing sector, and hopes that the Fed can find the right course. The question is how long markets can withstand this political turbulence and whether it will lead to more serious changes. Stay tuned.