Weekly Update 04/11/2025: Tariff Uncertainty Roils Markets as Inflation Showed Signs of Cooling – For Now
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Domestic Economic News
US inflation cooled broadly in March, indicating some relief for consumers prior to widespread tariffs that risk contributing to price pressures. The consumer price index, excluding often volatile food and energy costs, increased 0.1% from February, the least in nine months, according to Bureau of Labor Statistics data out Thursday. The overall CPI declined 0.1% from a month earlier, the first decrease in nearly five years. The inflation slowdown reflected a decline in energy costs, used vehicles, hotel stays and airfares. The cost of motor vehicle insurance — a main source of inflation in recent years — also retreated. The report showed little impact so far from tariffs already in place — in categories like toys and appliances that are more exposed to China — although that may change in coming months as President Donald Trump’s higher levies filter through the economy. And price declines for services like hotel stays and airfares may be a warning sign that some consumers are cutting back on discretionary spending. “It is the calm before the inflation storm. We’re going to get some higher inflation out of the tariffs,” said David Kelly, chief global strategist at JP Morgan Asset Management, on Bloomberg Television. “What we’re seeing is a lot of softness in the travel industry, which I think is going to get worse over the course of this year.”
While Trump announced 90-day pause on higher reciprocal tariffs on Wednesday — less than 24 hours after they came into effect — imports from most countries are now subject to 10% duties. The US began collecting tariffs last month on imported steel and aluminum, and levies on China now stand at 145% after retaliation from Beijing earlier this week. Some of the higher import costs will ultimately be passed on to the consumers, and companies from Target Co. to Volkswagen AG have warned higher prices are in store for Americans. The uncertainty is keeping Federal Reserve officials in wait-and-see mode as they look for more clarity on the impact the levies will have on inflation — and the economy more broadly. Even with some tariffs already in place in March, some of the categories more exposed to China posted declines, including toys, appliances and smartphones. The CPI report showed core goods prices dropped 0.1% last month, the first decrease since August. “The experience of tariffs on washing machines in 2018 suggests that it takes three months for consumer prices to respond to new tariffs, after which pass through is rapid,” Samuel Tombs, chief US economist at Pantheon Macroeconomics, said in a note. He added that the impact should be felt with the May CPI report.
While all eyes have been on the impact tariffs will have on goods prices, one of the key drivers of inflation in recent years has been housing costs — which are the largest category within services. Shelter prices rose at a moderate pace, reflecting the steepest drop in hotel stays in more than three years. There were still signs of lingering price pressures facing households. Owners’ equivalent rent accelerated to a 0.4% monthly pace and grocery costs increased 0.5%, matching the biggest gain since October 2022. Meat prices accelerated, while the cost of eggs posted a smaller advance than a month earlier. Within services, motor vehicle and household insurance, as well as car rental costs declined last month. Excluding housing and energy, services prices declined by the most in nearly five years, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index. That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI, which helps explain why it’s trending closer to the Fed’s 2% target. Another report published Thursday showed initial applications for unemployment benefits rose to 223,000 last week, remaining close to historical lows. Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Thursday that combines the inflation figures with recent wage data showed real average hourly earnings climbed 1.4% from the year before, the most since November.
US wholesale prices fell in March by the most since October 2023, restrained by energy costs and adding to evidence of muted inflation ahead of the Trump administration’s tariffs on US trading partners. The producer price index dropped 0.4% from a month earlier, according to a Bureau of Labor Statistics report released Friday. The median forecast in a Bloomberg survey of economists called for a 0.2% gain. Excluding food and energy, the PPI eased 0.1%, also below estimates. The figures mirror data published Thursday by the BLS that showed consumer prices also fell last month, for the first time since 2020, thanks in part to a decline in energy costs. Economists expect inflation to accelerate over the remainder of the year as sweeping tariffs on imported goods imposed this month by President Donald Trump filter through into higher prices for businesses and households. Friday’s numbers indicated that, for now, rising prices of imported goods are being offset by compression in wholesaler and retailer margins, suggesting businesses were absorbing costs from smaller tariffs that were already in place last month. “Retailers’ margins are already being squeezed,” Samuel Tombs, the chief US economist at Pantheon Macroeconomics, said in a note after the release. The numbers suggest “consumers will be shielded from some of the forthcoming increase in manufacturers’ selling prices and import prices,” he said. The report showed goods prices excluding food and energy rose 0.3% in March for a second month, marking the biggest two-month increase in two years. Oil field and gas machinery, sanitary paper products and x-ray equipment registered the biggest increases. Services prices, however, fell 0.2% — the most since July — as wholesale and retail margins continued to narrow. Retailers of items like televisions, sporting goods, motor vehicles and apparel saw the biggest declines in margins. In early February, the Trump administration put in place an additional 10% levy on goods imported from China, bringing the total to 20%. Since then, in a series of announcements after retaliation by Beijing, the president raised the total duty on Chinese goods to 145%. Earlier this week, Trump announced a 90-day pause on higher tariffs on most other US trading partners, opting instead for a10% tariff on imports. In addition, higher duties on aluminum and steel went into effect March 12. The overall impact on prices from these action may show up more clearly with the release of the April PPI data next month.
Analysts also pay close attention to the PPI because some of its components are used to calculate the Federal Reserve’s preferred measure of inflation that’s based on the personal consumption expenditures price index. Those categories were generally favorable in March: airfares fell by 0.4% and hospital services costs rose at a slower rate. The PCE report will be published later this month. While increased tariffs risk driving prices higher, subdued prices of many commodities may help temper the degree of pass-through to consumers and customers of the nation’s producers. A Bloomberg metals index that includes aluminum, copper, nickel and zinc — key inputs for manufacturers — is hovering near the lowest level since 2020. Moreover, crude oil prices have sunk to around $60 a barrel — close to four-year lows. Grains and livestock prices have also cooled. The March PPI report showed food prices slid 2.1% while energy costs dropped 4%. The costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, were flat. Unprocessed goods prices decreased 4.1%, reflecting declines in foodstuffs and energy materials.
US consumer sentiment tumbled to an almost three-year low while short- and long-term inflation expectations soared to multi-decade highs on growing tariff concerns. The preliminary April sentiment index slid 6.2 points to 50.8, the second-weakest reading on record, according to the University of Michigan. Economists called for a decline to 53.8, based on the median projection in a Bloomberg survey that had a wide range of estimates. Results of the Michigan survey were based on interviews from March 25 through April 8, prior to President Donald Trump’s Wednesday announcement of a 90-day pause on higher tariffs for dozens of US trading partners. Consumers expect prices to rise at an annual rate of 4.4% over the next five to 10 years, the highest since 1991 and up from 4.1% a month ago, data released Friday showed. They saw costs rising 6.7% in the coming year, the highest since 1981. In March, year-ahead inflation expectations stood at 5%. About two-thirds of consumers spontaneously mentioned tariffs during interviews for the survey, the university said. Since the end of January, the sentiment index has declined nearly 21 points. “Unemployment expectations have worsened sharply over the last few months, which may not lead to a pull-back in spending if consumers do not expect to be personally affected by layoffs or income losses,” Joanne Hsu, director of the survey, said in a statement. “Alarmingly, though, consumers are now worried that they will be personally affected.” The survey showed the share of consumers expecting higher unemployment in the coming year rose to the highest since 2009. Moreover, respondents’ saw the odds of losing their job in the next five years at the highest since July 2020. Income expectations also deteriorated. Prior to news on Wednesday that higher US tariff rates would be dialed back, American consumers had become more alarmed that sweeping tariffs would lead to higher prices. Trump’s trade policy has roiled markets and intensified consumer anxiety about personal finances and the job market on prospects for a weaker economy. Consumer price index data on Thursday showed inflation unexpectedly cooled in March, though that was prior to the full impact of the tariffs. The survey showed the current conditions gauge fell to 56.5 from 63.8, while the expectations index decreased to 47.2 — the weakest since 1980. Consumers’ outlook of their financial situation decreased in April to a fresh record low.
Goldman Sachs Group Inc. economists this week rescinded their forecast for a US recession after President Donald Trump announced a 90-day pause on most of his previously announced tariffs. “Earlier today, before President Trump’s announcement, we had shifted to a recession baseline in response to the additional country-specific tariffs that went into effect this morning,” the Goldman Sachs team, led by Jan Hatzius, said Wednesday in a note. “We are now reverting to our previous non-recession baseline forecast.” The rapid reversal underscores the challenges analysts and investors face in attempting to estimate the economic impact of the administration’s trade policy, which sometimes evolves by the hour. Shortly before 1 p.m. in New York, the Goldman team issued a note saying a US recession was now the base case, putting the probability of a downturn at 65% in the next 12 months. Trump posted on Truth Social minutes later, at 1:18 p.m., that he was implementing a 90-day pause on reciprocal tariffs above a 10% baseline on imported goods from trading partners other than China. That sent the stock market soaring. Goldman economists then issued another note at 2:10 p.m. reversing their earlier call. “This announcement leaves in place all prior tariffs and the 10% minimum portion of the ‘reciprocal’ tariff, and we continue to expect additional sector-specific tariffs at a 25% rate,” they said. “Together, these tariffs are likely to sum to something close to our previous expectation.”
Interest Rate Insight and the Fed
Treasuries gained after an unexpected ebb in US inflation last month enlivened bond traders shaken by President Donald Trump’s evolving trade policy. The advance on Thursday lowered yields on two-year Treasuries — the most sensitive to the Federal Reserve’s monetary policy — by as much as 10 basis points to 3.8%. Traders priced in expectations for three interest-rate cuts in the remainder of 2025, with a chance of a fourth, as data showed underlying inflation cooled broadly ahead of Trump’s early-April tariff announcement. “The downside surprise in inflation should be fairly encouraging to the rates market,” Gennadiy Goldberg, head of US interest rates strategy at TD Securities. Still, “the reaction may be brief as the market waits for more news on trade.” The short-end US yield declines followed a sharp jump a day earlier that saw rates rocket higher by as much as 30 basis points. Trump’s abrupt about-face on tariffs — in which he offered a 90-day pause on most higher “reciprocal” levies — spurred steep gains for stocks and a surge in short-term yields across much of Europe and Asia as traders greeted the reprieve by rapidly scaling back bets on interest-rate cuts. The yield on the German two-year note soared nearly 20 basis points before paring on expectations that the European Central Bank will need to ease less. In the UK, bonds rallied after borrowing costs hit their highest since 1998 this week. The US faced massive pressure from business leaders and investors to reverse course; Trump said he backed off as people were “getting a little bit yippy, a little bit afraid.” Both the Ten year and 30 year Treasury auctions went very well this week with significant demand – this also helped calm nerves in the bond market.
Federal Reserve Bank of Boston President Susan Collins said the central bank may yet lower interest rates later this year, but tariff-driven inflation could delay further cuts. “Renewed price pressures could delay further policy normalization, as confidence is needed that the tariffs are not destabilizing inflation expectations,” Collins said in remarks prepared for an event Thursday at Georgetown University in Washington. As policymakers wait for a clearer picture on how tariffs will hit the economy, Collins said keeping rates steady is the best approach “for the time being.” “I see monetary policy as well positioned to address a wide range of potential economic outcomes in this highly uncertain environment,” she said. Collins said her staff had estimated that an effective tariff rate on imports above 10% would increase the Fed’s preferred gauge of underlying inflation by a cumulative 0.7 to 1.2 percentage points, with most of the effect likely occurring this year. That inflation gauge stood at 2.8% in the year through February. She continued to expect inflation would gradually revert to the Fed’s 2% target over the “medium term.” The Boston Fed chief also anticipated economic growth would slow below “an already slowing trend in 2025” as demand cooled more than supply. Collins joined a number of Fed officials who’ve signaled their preference to continue holding rates steady in the wake of Trump’s recent tariff announcements. Chair Jerome Powell said last week the levies were significantly larger than expected, but repeated his view that policymakers need not hurry to adjust rates.
Impactful International News
America’s trading partners around the globe reacted with a mixture of relief and bewilderment to President Donald Trump’s eleventh-hour decision to pause some of his most aggressive tariffs. As government officials worldwide try to divine what would convince Trump to grant them permanent waivers, his newly demonstrated willingness to abruptly reverse course — or in China’s case, to apply additional pressure — inserts another layer of uncertainty. That’s left a sense of trepidation at what might come next, and the risk that it spills out from the economic sphere into other arenas. One Asian official said they were now in a guessing game to figure out what Trump wants. To many Europeans, the week’s US-written drama underlines their determination to tough it out, show unity, and deploy the trade heft that comes with membership of the 450 million-strong European Union. It was the US that blinked, not Europe, was one refrain. “There is maximum uncertainty in America,” said Germany’s chancellor-in-waiting Friedrich Merz, voicing the hope that the EU and US in negotiations could agree on the abolishment of all tariffs on both sides. “As far as I understand, Trump is now receiving a lot of criticism from within his own ranks and from the business community,” Merz, a former Blackrock Inc. Germany chief, told public broadcaster ZDF late Wednesday. “Therefore, we must be all the more reliable, clearer, and better on the European side. And Germany must play a leading role.” A mess. Appalling. Evidence of panic. Those were among the responses to Trump’s 90-day partial reprieve given by officials who asked not to be named discussing sensitive matters of trade and diplomacy. The move shows that the president is playing a game of chicken, one said. Another asked how they could be expected to work under these conditions, and faced with such methods.
In Asia, government officials are similarly puzzled by the president’s approach, and are still scratching their heads about how to deal with it. South Korea is unsure what he even wants, according to one government official. The acting prime minister of South Korea, one of four Asian nations and traditional US allies that have moved quickly to launch talks with the US to try and strike trade agreements, held a call with Trump on Tuesday. Seoul was surprised when the president then said just a few hours later that countries were “kissing my *ss” in the search for deals. Japanese officials say they are trying not to get too focused on Trump’s day-to-day changes of strategy and work instead with people around him to get a permanent trade deal over the line. A key person is Treasury Secretary Scott Bessent, who was at the Japanese ambassador’s residence in Washington on Tuesday evening for a cherry blossom viewing party. Tokyo hopes Bessent will help win over Trump to an agreement on reducing Japan’s trade surplus with the US, according to one senior Japanese official, although he said it’s still not clear what demands the US will make. Japan has sent two senior officials to Washington to lay the groundwork for negotiations. Bessent has said he’d be speaking to officials from Vietnam, Japan, South Korea and India soon, with a view to coordinating economic pressure on China. India won’t wait till the last minute for any deal and will use the 90-day window to set the contours of a trade pact, a government official said. Indian officials see the US as a more reliable partner than China and are keeping a watch for any potential dumping of goods from its Asian neighbor. Countries are now trying to gather information on how others are doing, according to another South Korean government official, who said the problem is nobody seems to have cracked the code on how to appease Trump. Ninety days looks like the minimum the US needs to negotiate with multiple countries over trade deals, said Kim Gunn, a member of the South Korean parliament’s foreign affairs committee. “I’m not sure if that’d be enough though,” he said. “You don’t want to be the last one in line and miss the chance to begin talks.”
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