Weekend Talking Points - 'Before and After'

Tariff-on, tariff-off. Tariff-on, tariff-off. Is this a macroeconomic Karate Kid? It’s become very difficult to interpret the latest data, which is mostly ‘before’ Trump’s reciprocal tariffs took effect — but what will they look like ‘after’? That’s what’s on Fed Chairman Powell’s mind.

US-China tariff deal sparks joy. The world’s two largest economies agreed to a 90-day partial reprieve on tariffs, and stock markets (predictably) went crazy. The NASDAQ composite index is now 9% above its pre-”Liberation Day” levels, and is only 5% below its mid-February highs. [Seeking Alpha]

TP: The US still has 30% tariffs on Chinese goods (that’s the 10% “base” tariff for all countries + the special 20% “fentanyl” tariff applied to China). And the US still has very large tariffs on most other countries in the world. Everyone loves a good ‘relief rally’, but I think it’s overdone.

But bond markets weren’t so impressed. First, money flowed out of “risk-off” assets (like bonds) and into “risk-on” assets (like stocks). Second, the risk of a recession seems to have evaporated again. The Fed Funds Futures market is now only pricing in >50% probability of a rate cut at the FOMC’s September 17 meeting!

TP: Remember: When bond prices fall, bond yields rise. That’s just math. And when bond yields rise (e.g., the yield on 10-Year US treasury bonds is currently 4.54%), mortgage rates generally move higher too.

April CPI (inflation) report was pretty tame. Both “headline” and “core” CPI (Consumer Price Index = inflation for you and me) rose just 0.2% month-over-month. That allowed the annual “headline” CPI figure to drop from 2.4% → 2.3%, while annual “core” CPI was stuck at 2.8%. There were no clear signs of tariff impact yet; most of the increase came from rising “shelter” (housing) costs.

TP: If you annualize the last three months of “core” CPI growth, you get 2.1%. And the PCE inflation measure is generally lower than the CPI (because it has a much lower weighting for “shelter” costs). And the Fed’s inflation target is 2% on “core” PCE. How close is close enough?

Surprise drop in housing index. In May, the MBS Highway Housing Index dropped 6 points (48 → 42), ending 5 consecutive months of improvement. Unusually, the index has yet to cross the 50 threshold between expansion (>50) and contraction (<50) in 2025. Most of the decline was driven by an 8-point drop in the Buyer Activity sub-index.

TP: With mortgage rates largely flat over the last month, this seems likely to have been caused by general concerns about the economy (“Liberation Day” tariffs, -0.3% 1Q 2025 GDP).

Rental rate declines accelerate. Realtor.com’s April rent report showed asking rents down 1.7% YoY (this was the 21st-straight month that national rents were down YoY), an acceleration from 0–1% YoY declines for most of 2024. The vacancy rate rose to 7.1%, as strong rental demand was outstripped by supply growth.

Retail sales fall flat. After a very strong March (+1.7%) driven by pre-tariff purchases, April retail sales rose just 0.1% MoM. This was expected, so wasn’t market-moving. But…the 0.2% MoM drop in the so-called “control group” (which excludes auto and gasoline sales) was a lot worse than expected.

Mortgage Market

Note: Going forward, we’re going to be using Freddie Mac’s weekly PMMS for our average mortgage rates. The numbers are pretty similar to what we were using before, and we know that the next week of data will always come out on early Thursday morning.

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• June 18 FOMC Meeting: 92% probability that the policy rate will remain at 4.25–4.50% (no rate cut). This went WAY up from last week.
• July 30 FOMC Meeting: 63% probability that the policy rate will remain at 4.25–4.50% (no rate cut). 34% probability that rates will be 25 bps below current (implying one 25 bps rate cut at this meeting).
• September 17 FOMC Meeting: 49% probability that rates will be 25 bps below current (implying one 25 bps rate cut on either July 30 or Sept 17, but not both). 19% probability that rates will be 50 bps below current (implying a 25 bps rate cut at both the July 30 and Sept 17 meetings).

They Said It

“We’re wired for everyday low prices, but the magnitude of these [tariff-driven] increases are more than any retailer can absorb…I’m concerned that the consumer will start to see higher prices. You’ll begin to see that towards the tail end of this month and then certainly much more in June.” — John D. Rainey, Walmart’s CFO

“We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks.” — Jerome Powell, Federal Reserve Chairman