#TradeWarEases #PCEMarketWatch #Fed #USeconomy
Today we will delve into the fresh economic data from the US for May 2025 to understand where the economic winds are blowing and how this may impact our favorite markets. The goal of this article is not just to list numbers, but to analyze their interconnections, identify key driving forces, and of course, draw conclusions that will help you stay one step ahead.
Key points and theses
First, let's look at the actual data for Friday. We have gathered the latest economic summaries, and here's what stands out:
Consumer sentiment: Cautious optimism at a low start.
US consumer sentiment in May 2025 showed a slight increase to 52.2, returning to April levels but still remaining at 2022 lows. This indicates a fragile stabilization following a recent decline.
Initial concerns surrounding preliminary data have somewhat dissipated by the end of the month. As noted by Surveys of Consumers Director Joanne Hsu, the temporary pause on some tariffs for Chinese goods contributed to this slight uptick. However, despite the modest improvement in overall sentiment, the current conditions index has deteriorated, indicating ongoing difficulties in the everyday lives of Americans. It's important to note that the level of 52.2, while corresponding to April, is significantly lower than the 69.1 recorded in May 2024, highlighting the scale of decline over the past year. Inflation expectations for the year ahead have risen slightly (to 6.6%), but long-term forecasts have been revised down (to 4.2% from 4.4% in March), ending an 'unprecedented four-month streak of increases' for long-term expectations.
Chicago Business Barometer (PMI): Contraction continues.
The Chicago Business Activity Index (Chicago PMI) fell to 40.5 in May, demonstrating the 18th consecutive month of contraction in economic activity and the sharpest decline in the last four months. This is a clear signal of weakness in the manufacturing sector.
Analysts' expectations for improvement did not materialize, highlighting the seriousness of economic uncertainty. The decline in new orders, unfilled orders, and production is a worrying signal. Interestingly, employment and supplier delivery metrics increased, which may indicate companies are trying to adapt to reduced demand conditions.
US stock market: Volatility amid trade wars, but May is positive.
American stock indexes fell on Friday due to escalating trade tensions but confidently finished May in the green.
Statements by President Trump about China's 'violation' of the trade agreement and prolonged negotiations created short-term turbulence, leading to a nearly 0.3% drop in the three major indexes on Friday. However, overall economic data, including PCE inflation, which was within expectations, and the slowdown in personal spending growth, bolstered hopes for potential Fed rate cuts this year. This, along with a previously concluded trade deal between the US and the UK, helped the markets show solid growth for the month.
Treasury yields: Dancing on trade swings.
The yield on 10-year US Treasury bonds fluctuated around 4.4% on Friday, having fallen by more than 20 basis points in May.
The bond market is highly sensitive to trade news, especially Trump’s statements and court decisions on tariffs. The decrease in inflationary pressure, confirmed by PCE data, and the slowdown in personal spending growth amplify expectations for Fed rate cuts, which traditionally lead to lower bond yields.
Dollar index (DXY): Fifth month of decline.
The US dollar index (DXY) recorded its fifth consecutive monthly decline, marking the longest losing streak in five years.
Traders are concerned that Trump's trade policy may harm the economy and weaken the dollar's appeal as a 'safe haven.' Weak data on consumer spending (up 0.1% after 0.7% in March) and the slowdown in core inflation (to 2.5% year-on-year – the smallest increase in four years), along with the contraction of the US economy in the first quarter of 2025 (GDP fell by 0.2% or 0.3% year-on-year, marking the first quarterly contraction in three years) – all signal growing consumer anxiety and slow economic growth.
Wholesale inventories: An unexpected stagnation.
Wholesale inventories in the US remained unchanged in April 2025, failing to meet market expectations for growth.
This may indicate businesses' caution regarding future sales or a slowdown in demand. The decline in inventories of durable goods alongside an increase in non-durable goods paints a picture of uneven demand.
Trade deficit in goods: Sharp narrowing due to imports.
The US trade balance deficit significantly narrowed in April, mainly due to a sharp decline in imports.
New tariffs from the Trump administration appear to be working, causing nearly a 20% drop in imports across a wide range of categories (consumer goods -32.3%, industrial goods -31.1%, cars -19.1%). Meanwhile, exports continued to grow (by 3.4%), which is a positive aspect, although the decline in exports of cars and consumer goods requires attention.
Personal incomes: Growth above expectations.
Personal incomes in the US rose more than expected in April 2025, mainly due to an increase in current transfer receipts.
This growth (by 0.8% month-on-month) is a bright spot amidst a slowing economy. The increase in transfers (by 2.8%) and steady growth in employee compensation (by 0.5%) indicate that consumers still have money, which may provide some support for future spending despite overall caution.
PCE Inflation: Stability and slowdown.
PCE price indexes (both overall and core) showed moderate growth of 0.1% month-on-month in April 2025, with annual figures slowing to their lowest levels in several years.
This is a key indicator for the Fed, and its stability and the slowdown in annual growth (to 2.1% for overall and 2.5% for core, the lowest since March 2021 for core PCE) confirm that inflationary pressures are easing. This gives the Fed more room to maneuver regarding interest rates.
Consumer spending: Moderate growth after a spike.
Personal consumption expenditures in April 2025 rose modestly, slowing after the March spike.
The slowdown in spending on goods (especially durable goods like cars and clothing) following the March increase is likely related to consumers stocking up in advance of tariff implementation. Meanwhile, spending on services increased, indicating a reallocation of consumer demand.
Factor analysis
Trade wars and tariffs: Statements by President Trump and the introduction of new tariffs have an immediate and significant impact on market sentiment, bond yields, the dollar exchange rate, and the trade balance. Analytical studies show that new tariffs could lead to a decrease in real US GDP by 0.9 percentage points in 2025, as well as an increase in inflation by 2.3% in the short term, proving that geopolitics is not just a backdrop but an active participant in the economic game.
Inflationary pressure: Sustained slowdown in inflation (PCE metrics) is a key factor giving the Fed the 'green light' for potential interest rate cuts. This, in turn, supports the stock market and affects bond yields.
Consumer activity: Mixed signals from consumers (ambiguous sentiments, slowing spending on goods, but rising incomes and spending on services) show adaptation to changing economic conditions. The rise in personal incomes, especially due to transfers, may provide a safety cushion.
Manufacturing sector: Continued contraction in Chicago PMI, as well as the contraction of US GDP in Q1 2025, highlight regional and sectoral weaknesses that could be harbingers of broader economic problems.
Conclusions
The Fed at a crossroads (or not?): Data on inflation and consumer spending clearly suggest that the Federal Reserve is gaining more arguments for lowering interest rates this year. The market has already priced in these expectations, although the analytical consensus on the number and timing of cuts remains uneven, with some forecasts suggesting up to three cuts in 2025.
Trade wars are no joke: Tensions in trade relations with China continue to be a major source of uncertainty and volatility for the markets. A single social media post can shift billions, and economic models predict tangible negative consequences for GDP and income.
The consumer is not giving up but is being cautious: Despite overall anxiety and a slowdown in some sectors, personal incomes are rising, and spending is being reallocated. This indicates that the American consumer is a resilient creature, but is no longer as reckless as before. Unemployment, by the way, remains steadily at 4.2%, indicating a relatively strong labor market despite other alarming signals such as the GDP contraction in the first quarter of 2025.
The dollar under pressure: The prolonged decline in the DXY reflects not only expectations of rate cuts but also growing concerns about the long-term consequences of trade policies for the US economy and its ability to maintain its appeal as a safe haven.
Now let's consider the overall situation. The latest economic data from the US paints a nuanced and contradictory picture that certainly deserves our close attention. May 2025 brought us a whole palette of indicators, from consumer sentiment to the trade balance, each whispering its story about the current state of the world's largest economy.
Let's start with consumer sentiment. After a slight fluctuation in early May, by the end of the month, it stabilized, returning to April levels, but still hovering at 2022 lows. This is certainly not cause for fireworks, but as Surveys of Consumers Director Joanne Hsu noted, the temporary pause on tariffs for Chinese goods gave consumers a breath of fresh air. This shows how fragile optimism can be, dependent on a single tweet or decision. Short-term inflation expectations have risen slightly, but long-term forecasts have fortunately been revised downward. It seems consumers believe this inflationary 'monster' is tamed.
Now about the manufacturing sector. Things are not so cheerful here. The Chicago Business Activity Index (Chicago PMI) fell to 40.5, continuing to contract for the 18th consecutive month and showing the sharpest decline in four months. This is like a chronic cough that just won't go away. The decline in new orders and production is not just numbers; it's a signal that companies feel uncertainty and are hesitant to expand. However, the increase in employment and supplier deliveries may indicate that businesses are adapting, trying to make the most of current conditions.
The stock market is a different story. Despite a slight decline on Friday due to escalating trade wars (President Trump again made headlines on social media, accusing China of 'total violations' of the agreement), May was overall a very successful month for American stocks. The S&P 500 rose by more than 6%, the Nasdaq jumped by 10%, and the Dow climbed about 4%. Why? Because as soon as hints of slowing inflation appear (and the PCE data confirms this), investors start dreaming about Fed rate cuts. And for the markets, that's like balm for the soul.
The US dollar seems tired of being the 'king of the hill.' The DXY index has fallen for the fifth consecutive month – the longest streak in five years! This is not only a reaction to expectations of rate cuts but also to growing concerns about how Trump's trade policies will affect the economy. Analysts estimate this impact could be quite significant: a projected GDP decline of 0.9% in 2025 and a 2.3% rise in inflation in the short term due to tariffs. When the 'safe haven' starts to storm, investors look for other shores.
Inflation, our long-time 'friend,' is finally behaving properly. The PCE metrics that the Fed loves the most show stability and a slowdown in annual growth (to 2.1% for overall and 2.5% for core – the lowest level for core PCE since March 2021). This is great news, as it gives the regulator more maneuverability and possibly the rate cuts that have been widely discussed. The consensus among analysts on this matter is not entirely unequivocal, but more and more experts see prospects for easing monetary policy.
And finally, consumer spending and personal incomes. Spending rose modestly, slowing after the March spike, when people likely rushed to stock up before tariffs were implemented. But personal incomes rose more than expected, largely due to transfer receipts. This means that Americans still have money and are willing to spend it, albeit more selectively, preferring services to goods. It is important to note that the unemployment rate in the US remains stable at 4.2% (April 2025 data), indicating a relatively strong labor market despite other alarming signals, such as the GDP contraction in the first quarter of 2025.
So what? The US economy is in a phase of adaptation. Trade wars continue to create turbulence and exert tangible negative impacts, but inflation is slowing, opening doors for softer monetary policy. The consumer, though cautious, is not broken. For the crypto market, this means we may see continued volatility, but also potential opportunities if the Fed indeed proceeds with rate cuts. Be alert to the news, analyze the data, and remember: in the crypto world, as in life, being informed is your best defense.
A look into the future: What awaits us in the first week of June?
While we digest the May data, markets are already gearing up for a new, potentially 'turbulent' week starting June 2. We have a whole array of events that could significantly impact dynamics.
First of all, trade threats again. After President Trump's accusations that China has 'totally violated' the preliminary trade agreement, markets will closely monitor developments on this front. Any escalation could immediately reflect on investor sentiment and, of course, on the dollar exchange rate.
Secondly, key US labor market data is on the agenda. Employment reports, including ISM Manufacturing and Services PMI (Purchasing Managers' Indexes in manufacturing and services), as well as the number of job openings (JOLTS), will give us a fuller picture of the labor market's state. Strong data could weaken arguments for rate cuts, while weak data could strengthen them.
Thirdly, speeches from Fed representatives are expected. Any word from them regarding future monetary policy will be scrutinized under a microscope.
And finally, the global aspect: decisions on interest rates from the European Central Bank, Bank of Canada, and Reserve Bank of India, as well as key inflation indicators from the Eurozone, South Korea, Switzerland, and Turkey. GDP data from Switzerland, South Africa, and Australia, as well as trade volumes from Australia, Canada, Brazil, Germany, and France – all this will add color to the global economic picture.
Get ready, it's going to be interesting! Keep a close eye on the news and stay informed to make informed decisions in this unpredictable yet exciting crypto world.
