Month: May 2025

Note: I am travelling until mid-May. Postings will be irregular.

March Consumer Spending About More than Just Tariffs

(…) Real personal spending shot up 0.7% in March even as February’s comparatively modest spend was revised higher. In what may be that last month without meaningful tariff impact, inflation was a non-factor in March with both headline and core inflation flat over the month.

An immediately evident theme here is that people who were even thinking about buying a new car, truck or SUV headed out to make that purchase in March before April tariffs had a chance to impact the sale price. The $57 billion increase in motor vehicles and parts was bigger than the increases of the next four largest categories combined. (…)

Source: U.S Department of Commerce and Wells Fargo Economics

Income growth remained stable through March. Real disposable personal income, a measure of households purchasing power, rose by the most since the start of last year (+0.5%) amid sturdy wage growth. Income growth has slowed over the past year consistent with increased signs of a moderation in the labor market, yet it has not been a straight deterioration.

Source: U.S. Department of Commerce and Wells Fargo Economics

Hard data are still in the pre-tariff era but this chart suggests spending is unsustainable at current levels unless employment and/or wages accelerate…

… which looks problematic seeing weekly and continued unemployment claims spiking.

The McRecession hits fast food chains

Low- and middle-income consumers are increasingly shying away from fast-food restaurants like McDonald’s, a sign that people are pinching pennies amid recession fears.

• The number of low-income consumers visiting U.S. fast-food restaurants was down “nearly double digits” in the year’s first three months compared to 2024, McDonald’s CEO Christopher Kempczinski said Thursday.
• Visits from middle-income consumers across the industry “fell nearly as much,” he added.

Concerns about job losses and fears about price hikes from President Trump’s tariffs have fueled what Conference Board senior economist Stephanie Guichard recently called “pervasive pessimism about the future.”

• And that’s translated into fewer people coming through the door at McDonald’s and other fast-food restaurants.
• “Economic pressure on traffic has broadened,” Kempczinski said. “I think we are seeing that people are just being more judicious about cutting back on visits.”
• One way the trend is manifesting: People are skipping breakfast “or they’re choosing to eat at home,” Kempczinski said.

Signs of a fast-food slowdown are spreading.

• U.S. comparable sales fell 3.6% at McDonald’s, the company’s worst showing since the pandemic.
• Starbucks‘ comparable sales declined 1% in the quarter, the coffee giant announced Wednesday, its fifth consecutive quarterly decline.
• Domino’s Pizza said consumers are gravitating from more expensive delivery options to cheaper carryout.
• And Wingstop CEO Michael Skipworth flagged “a meaningful pullback in our business” in “specific pockets,” including Hispanic customers and “lower middle income” consumers.

Meanwhile, data from Placer.ai, which analyzes customer activity, shows visits fell 1.4% across the overall dining segment in the first quarter, with quick-service and fast-casual chains seeing a 1.4% drop.

• Chipotle’s comparable restaurant sales decreased 0.4% in the first quarter of 2025 — its first decline since COVID lockdowns in 2020.

The slowdown isn’t happening everywhere.

• Taco Bell is on a roll. The Yum Brands chain posted a U.S. comp sales increase of 9% in its most recent quarter.
• Chris Turner, Yum Brands chief financial and franchise officer, credited Taco Bell’s expansion of luxe value boxes as delivering “exceptional value across income levels, with the $5 Luxe box becoming a massive win with low-income consumers.” Taco Bell’s reputation for value, however, could also be exacerbating the trend for competitors, as consumers look to treat themselves at a lower cost. The chain is “well positioned to navigate this environment… with an opportunity to take share from higher-priced competitors,” Turner said Wednesday. (…)

FYI: Credit Card Data Shows More Consumers Under Pressure

US Manufacturing Activity Shrinks by the Most Since November

The Institute for Supply Management’s factory gauge eased 0.3 point to 48.7, data out Thursday showed. The group’s production index stumbled more than 4 points to 44. (…)

The report also showed the strategy of rushing in imports ahead of tariffs is drawing to a close. The ISM imports index declined at the fastest pace since the end of 2023.

In addition to the headwinds posed by sluggish demand, producers are also contending with higher costs. A measure of prices paid for materials increased to the highest level since June 2022 despite cheaper energy costs.

“Demand and production retreated and destaffing continued, as panelists’ companies responded to an unknown economic environment,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Prices growth accelerated slightly due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth.” (…)

Ed Yardeni’s charts:

John Authers highlights the sharp decline in production…

… and the strange surge in yields:

So, unmistakably negative manufacturing numbers caused a sharp rise in bond yields. Why? Mainly because of some bizarre inconsistencies in the report. The overall number wasn’t as bad as the consensus had predicted, largely because new orders were way ahead of estimates. What’s strange is that those estimates had been compiled by comparing with data from new orders coming out of the industrial surveys run by different branches of the Federal Reserve.

In the following chart, from Omair Sharif of Inflation Insights LLC, the red line is the official ISM new orders number, while the dark blue shows the implied figure generated by the regional Fed surveys

S&P Global’s PMI survey has new orders growth “marginal overall and the softest recorded in 2025 so far”.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) recorded 50.2 in April, unchanged since March. (…)

Manufacturing production declined for a second month in a row during April, albeit marginally and at a slower pace than in March. This partly reflected ongoing gains in new work, for which April’s survey indicated a fourth successive monthly rise. Some firms reported that sales had risen on the back of clients switching, where possible, to US produced goods due to tariffs on imports.

International sales fell and acted as a noticeable drag on total new order book growth, which was marginal overall and the softest recorded in 2025 so far. New export orders declined to the greatest degree since last November. Tariffs were reported as the key reason behind the decline in new export sales. (…)

Tariffs PMI Input Prices and exchange rate factors were cited as pushing up the price of inputs during April. In response, firms sought to protect margins by increasing their own selling charges to the greatest degree since early 2023. (…)

Meanwhile, stocks of finished goods were reduced for a fifth month in a row, and to the greatest degree of the year so far. In some instances, subdued sales forecasts led firms to adjust their inventories downwards.

Lackluster growth in order books and uncertainty about future prospects meant on average manufacturers reduced employment for the first time since last October, generally by choosing not to replace leavers at their plants.

CANADA: Tariffs lead to sharpest falls in output and new orders since height of COVID-19 pandemic

(…) The primary drivers of April’s low PMI reading were steep reductions in both production and new orders. In each case, contractions were also the sharpest since May 2020. Firms widely noted the impact of tariffs, especially uncertainty over the direction of US trade policy. This was especially the case for investment goods producers, where output and new work continued to fall particularly steeply.

New export orders were inevitably impacted by tariffs, with latest data showing the greatest reduction in exports for five years. Again, uncertainty over US trade policy was largely reported to have led to hesitancy and delays in decisionmaking amongst clients. (…)

China Manufacturing Slumps on US Levies, Spurring Stimulus Calls

The official manufacturing purchasing managers’ index fell more than expected to 49 from 50.5 in March, the National Bureau of Statistics said Wednesday. The non-manufacturing measure showed activity in construction and services grew less than forecast. (…)

The downbeat indicators for factories followed an earlier warning sign for China’s exporters, with cargo shipments plunging possibly by as much as 60%, according to one estimate. (…)

New export orders fell to the lowest since December 2022 and recorded the biggest drop since April that year, when Shanghai entered a citywide pandemic lockdown. A subgauge indicated that employment in the manufacturing sector contracted at the worst pace since February last year, adding pressure on authorities to stabilize the job market.

To help ease the pressure on exporters, Beijing this week laid out plans to help struggling firms access loans and to boost domestic consumption, but stopped short of announcing more aggressive economic stimulus. Instead, officials are focusing on executing the stimulus package approved in early March.

The Caixin manufacturing PMI for April was 50.4, higher than a forecast of 49.7. The figures indicated growth from the previous month albeit at a slower pace. The private gauge tends to reflect activity in smaller and more export-oriented companies.

“The US tariff hikes took a toll on external demand, with new export orders declining at the fastest rate since July 2023, leading to just a marginal increase in total new orders in April,” said Wang Zhe, senior economist at Caixin Insight Group.

The Caixin PMI notes that total new orders kept rising but at a “softer pace”:

Contributing to the lower headline reading was a slower increase in total new orders in April. Trade disruptions resulting from higher US tariffs reportedly contributed to the first fall in new export orders for three months. Weaker external demand dampened growth of overall new orders, which increased at the softest pace in seven months.

Trade disruptions and supply-side constraints resulted in a slight lengthening of supplier lead times in April. However, greater competition among vendors amid subdued demand for inputs led to another drop in average input costs in April. Firms often shared cost savings with their customers, and lowered their selling prices for a fifth straight month in April. Exporters also cut their prices, with average export charges declining for a third successive month.

• US GDP contracted in the first quarter, driven by a sharp surge in imports ahead of impending tariffs.

Home Builders Are Piling on Discounts as They Struggle to Entice Buyers Demand during the spring home-buying season has been disappointing, and tariffs threaten to raise costs

(…) The spring buying season, when builders make close to 40% of their annual sales, is halfway over. Based on earnings released by listed builders, demand has been disappointing. America’s biggest builder, D.R. Horton, said revenue fell 15% in its latest quarter compared with a year ago, while PulteGroup’s sales dropped 2%. 

This is before the pain of tariffs is really felt. Builder LGI Homes said this week that its suppliers sent notice that they plan to raise prices soon for some components imported from China. Builders rely on Chinese manufacturers for white goods, parts for heating and ventilation systems and porcelain fittings.

D.R. Horton and Lennar told investors that their building-materials providers are holding fire for now, but they expect import levies to push up construction costs later this year. Builders think new-home prices will rise by anywhere from $5,000 to $15,000 as a result of the trade war.

The timing is terrible. Affordability is already so stretched that builders have been offering sweeteners including mortgage-rate buydowns, price cuts and design upgrades to get deals over the line. The number of completed but unsold new homes sitting on their lots has reached the highest levels since 2009.    (…)

Competition from existing homeowners putting their properties on the market is also rising fast in Sunbelt states, where home builders have most of their unsold units. This will make it even harder to sell excess inventory. Lennar is currently offering incentives equivalent to 19% of the purchase price to buyers in its South Central region, which includes Texas, Kansas, Missouri and Oklahoma. (…)

Apple Says Most of Its Devices Shipped Into U.S. Will Be From India, Vietnam

(…) Chief Executive Tim Cook said the impact in the June quarter from tariffs, assuming existing policies remain in place, would add $900 million to Apple’s costs, a figure he suggested could be worse in future quarters. (…)

Cook said during a call with analysts that a “majority” of iPhones sold in the U.S. during the June quarter would come from India, while “nearly all” of the company’s other devices sold in the U.S. during the period would come from Vietnam. The devices include iPads, Macs, the Apple Watch and AirPods. (…)

GM Faces Up to $5 Billion Tariff Bill in 2025, Slashes Outlook

Tariffs will wipe out up to a quarter of General Motors’ GM -0.42%decrease; red down pointing triangle<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> net profit for the year, the company said Thursday.

The country’s largest automaker said it faces $4 billion to $5 billion in tariff-related costs this year, which it aims to partially offset by pulling back on spending and increasing production at its U.S. factories.

GM said Thursday that it now expected its full-year net profit to be between $8.2 billion and $10.1 billion, down from a prior projection of $11.2 billion to $12.5 billion. (…)

The company manufactures more than 1.5 million vehicles in the U.S., but that accounts for roughly half of its total sales in the country.

Chief Executive Mary Barra said the company planned to reduce its tariff bill by building more pickups at its Fort Wayne, Ind., factory and making more electric-vehicle battery modules in the U.S. The company said it was also looking to trim costs where it could. “We are scrutinizing our discretionary spending everywhere,” Barra said on the call. (…)

GM imports its most affordable vehicles, such as the Chevrolet Trax and Buick Envista, from South Korea. Imports from that country and other costs accounted for $2 billion of the company’s estimated tariff bill, Jacobson said.

GM said sales rose 17% during the first three months of the year, but believed that much of that increase was due to people and businesses purchasing vehicles ahead of Trump’s tariffs. (…)

“Making bigger, broader decisions—it’s not really smart to do that until we really know what the regulatory environment is going to be,” Barra said. “We’re going to work on compliance until the regime changes.”

Dominion Says Tariffs May Add $500 Million to Wind Project Cost

President Donald Trump’s tariffs threaten to increase the cost of a big offshore wind farm that Dominion Energy Inc. is building by as much as $500 million, the company said Thursday.

The Coastal Virginia Offshore Wind project off the coast of Virginia has already seen tariff costs of $4 million, Chief Executive Officer Bob Blue said on an earnings call. The project’s current budget is $10.7 billion.

If the tariffs continue through the end of the second quarter, the added cost for CVOW would rise to $120 million, and if kept in place through the end of next year, when the project is expected to enter service, the impact would be approximately $500 million.

• Amazon hasn’t seen the average selling price appreciably increase or demand slip, Jassy said, though the company has noticed “heightened buying in certain categories that may indicate stocking up in advance of any potential tariff impact.” Amazon Chief Financial Officer Brian Olsavsky said the company is preparing for different scenarios, and that it stocked ahead of tariffs.

More from John Authers:

Similar strictures apply to the earnings season. The first quarter’s results have generally been better than expected, by a greater margin than usual. But the direction of analysts’ estimates for the full year is unusually negative, as illustrated by Andrew Lapthorne, chief quantitative strategist at Societe Generale SA. The downgrade for the US is worse than for most, and Japan is the only spot of relative optimism:

Downgrades like this are unusual. As Lapthorne summarized:

Earnings are being downgraded, margins are under pressure and analysts are posting 2.5x more downgrades than upgrades in the S&P 500, a rarity during a reporting season. And this is all before we start incorporating tariffs impact.

BTW:

The Fed’s latest Financial Stability Report finds that roughly 15% of investment-grade and 27% of speculative-grade corporate debt is scheduled to mature in the next one to three years, “indicating that the pass-through of higher interest rates into debt-servicing costs may increase if borrowing costs stay elevated.”

Meanwhile, still-elevated interest costs in the context of a broader economic slowdown “could amplify existing vulnerabilities linked to high leverage and upcoming refinancing needs,” the Fed warns.

The report goes on to flag persistently large unrealized losses lurking on bank balance sheets from underwater securities accumulated during lower prevailing interest rates.  That sum remained near $500 billion at the end of last year according to the Federal Financial Institutions Examination Council. (ADG)

China Signals Readiness to Respond to U.S. Trade Overtures Beijing again seeks end to Trump’s tariffs and calls for ‘sincerity’

China said Friday it was weighing starting talks with the U.S. to halt a trade war, but only if Washington shows sincerity through concrete measures such as by canceling tariffs against Beijing.

A Chinese Commerce Ministry spokesperson said “China is currently evaluating” repeated comments and messages from U.S. officials that “expressed their willingness to negotiate with China on tariffs.”

“China’s position is consistent. If you want to fight, we will fight to the end; if you want to talk, our door is wide open,” the ministry spokesperson said. “If the U.S. wants to talk, it should show sincerity to talk, and be prepared to act in correcting its erroneous actions and canceling unilateral tariffs.” (…)

“I’m not going to drop them unless they give us something that’s, you know, substantial,” Trump told reporters last week. (…)

The Commerce Ministry’s statement on Friday dovetailed with earlier messaging from the Chinese Foreign Ministry, which published a social-media video this week saying Beijing would “never kneel down” in the face of American efforts to force a trade deal.

The video also appealed to other countries to defy American pressure, saying, “When the rest of the world stands together in solidarity, the U.S. is just a small, stranded boat.”

Trump has said he doesn’t expect the tariff on Chinese goods ultimately to be “anywhere near” the current 145% figure. In the Friday statement, the Commerce Ministry said it has noted what it called repeated U.S. signaling on the possibility of adjustments to Trump’s tariffs, but remained on guard.

“Saying one thing and doing another, or even trying to coerce and blackmail under the guise of talks, will not work with China,” the spokesperson said.

Japan’s Kato Says US Treasury Holdings Could Be Negotiation Card

(…) “It does exist as a card,” said Kato, speaking on a TV Tokyo program Friday, when asked if Japan’s stance of not selling holdings could be a negotiation tool. “Whether or not we use that card is a different decision.”

While the comments were made in response to a question and don’t appear to suggest Japan is considering selling any of its US Treasury holdings, they open the possibility of large market ructions if action took place.

“This is a very serious tactic to discuss publicly,” said Kathy Jones, chief fixed-income strategist at Charles Schwab in New York. “Just the threat of it could have implications for the Treasury market, although I think Japan’s finance officials are smart enough to know that actually following through on it could be harmful to their own economy.” (…)

Yet the leverage Japan possesses in the market is likely to keep investors on edge. It held roughly $1.13 trillion in Treasury Securities at the end of February, the biggest overseas holder of the US debt, followed by China’s $784 billion, according to the US Treasury. Japan holds Treasuries as part of a special account that can be used to fund currency interventions.

Kato’s comments stand out because officials in Tokyo have typically been very guarded in their remarks on Treasuries, and misspoken words can have an unexpectedly big impact on markets. In addition to that, Treasuries trading has been tumultuous over the past month as investors reacted to the heightened risks from the trade war. (…)

Kato also struck a different tone from those made by the ruling party’s policy chief Itsunori Onodera in April, when he said that “as an ally, we would not intentionally take action against US government bonds, and causing market disruption is certainly not a good idea.” (…)

Kato also said that Japan doesn’t hold US Treasuries to specifically support the US.

Japan’s chief negotiator Ryosei Akazawa is in Washington for a second round of talks this week with his US counterparts, as countries around the world watch to see where the negotiations end up. Akazawa indicated that Japan aims to achieve a trade agreement with the US in June, with the high-stakes bilateral discussions expected to gain momentum in mid-May. (…)

The Real Global Contest Is Over Capital

John Zito Co-President, Apollo Asset Management:

In today’s policy debates, most of the attention centers on goods, how we tax them, trade them, or protect them. Tariffs, reshoring, and supply chains dominate headlines. But the more consequential global contest may not be over goods at all, but rather over capital.

The United States has long sat at the center of global capital markets—playing a defining role over eight decades. The US hasn’t just exported products; it exported a system: one rooted in trust, transparency, the rule of law, and the idea that innovation will be rewarded. That system has created deep structural advantages.

US-listed companies have consistently traded at 40%–70% valuation premiums over global peers —not just because of earnings strength or sector mix, but because capital trusts this system—investors see the US as one of the most stable, scalable, and trustworthy places to deploy capital.

Benefits of this dominance extend far beyond financial assets, helping to drive productivity and innovation, job creation and growth of the real economy. It’s allowed the US dollar to serve as the global reserve currency.

Now, as we enter an era of economic and geopolitical realignment, the US would be wise to treat its capital markets leadership as the strategic asset it is. The longer and more volatile the path to a trade policy reset, the greater the risk to this regime and its benefits.

Today, the American market enjoys an enviable position. US equity markets represent about 50% of global stock market capitalization. The bond markets — valued at more than $50 trillion — remain the most liquid and sophisticated in the world. It’s home to seven of the world’s 10 largest asset managers and almost 60% of global venture capital deployment as of 2024. And it attracts more foreign direct investment than any other country in the world.

The benefits of leading capital markets are difficult to understate. They go well beyond public markets – the US has long been the hub for venture capital, private equity and institutional capital formation, funding innovation across technology, healthcare, energy and more.

Vibrant capital markets enable a nation to finance its growth, fund new infrastructure, create more jobs, and even successfully impose sanctions and protect national security.

Greater capital markets competition undoubtedly lies ahead. While regions like Asia and the Middle East are working to strengthen their capital markets, Europe—with its economic scale, institutional foundations, and regulatory momentum—may be best positioned to make meaningful strides.

After years of fragmentation — Brexit, regional divergences, and overlapping regulation— there’s now a window for meaningful capital market modernization. With an ambitious plan to raise €800 billion for defense over four years through joint European Union borrowing, renewed alignment between France and Germany, growing appetite for reform, and the urgency brought on by global market volatility, the ambition is real. And the intent is clear.

There are several levers Europe could pull to accelerate its emergence as a stronger capital markets contender.

Europe has a significant opportunity to reform its banking system by transitioning $10 trillion in aging assets to private credit markets, which would free up bank balance sheets and support new credit formation. Capital markets integration could enhance liquidity, improve valuations, and make European listings more attractive, helping to close the valuation gap with US companies. Reviving large-scale infrastructure projects through public-private investment programs could modernize physical assets and boost business confidence. And reforming capital frameworks could elevate the euro as a credible reserve currency competitor, potentially offering investors an attractive store of value and providing global central banks with a reliable pillar for long-term allocation.

These are not abstract ideas. There is clear momentum behind a growth-oriented reform in Europe and—if implemented effectively, these ideas can position Europe as a much more attractive destination for global capital flows. The window is certainly open.

The risk is not that the US falls behind overnight. It won’t necessarily show up in next quarter’s earnings. Rather, it is that capital gradually begins to price the US like any other market. If that happens, the US loses the premium and the multiplier effect.

That multiplier—the one that flows through into higher valuations, cheaper capital, stronger equity compensation, and faster innovation—is not just a Wall Street story, it’s a Main Street issue. If US capital markets begin to trade with global markets rather than at a premium to them, the consequences will be measured not in basis points, but in trillions of dollars in lost enterprise value. It could mean substantial cuts in jobs tied to innovation and loss of long-term investment.

Today’s dialogue should focus on long-term competitiveness. The widely held assumption that capital will always flow to America may no longer hold. If the US projects volatility or retreats into unpredictability, it risks ceding what has taken decades to build—and inviting others to fill the void.

Goldman Sachs: How Overvalued is the Dollar?

• The Dollar’s strong valuation has been driven by elevated global allocations chasing superior return prospects in the US. With those returns now eroding, we expect the Dollar’s misalignment – which our formal models estimate at around 16% – to erode gradually as well.

• Valuation is not a catalyst in and of itself and so exchange rates can trade far from their long-run fair value for extended periods, as has been the Dollar’s case over the past decade. However, when there is a rapid and large enough shock to macroeconomic fundamentals, currency adjustment back to fair value and/or large shifts in the fair value itself can be relatively fast. We have seen this before, for example with GBP during Brexit and with EUR during the gas supply shock. Finally, we would note that it is not unusual for currencies to overshoot once fair value is reached.