Output growth hits 16-month low as confidence slumps and selling prices rise at increased rate

The headline S&P Global US PMI Composite Output Index fell from 53.5 in March to 51.2 in April, according to the preliminary ‘flash’ reading (based on approximately 85% of usual survey responses). The fall in the index signals a deceleration of activity growth to a 16-month low from the three-month high seen in March.

Growth of service sector business activity slowed sharply to only a modest pace, registering the second-weakest expansion recorded over the past year, in response to slower order book growth.

New business inflows in the services sector showed the second-smallest gain recorded over the past 11 months, often linked by survey respondents to uncertainty surrounding the economy and tariffs. Demand growth was subdued in particular by a fall in exports of services (which include tourism-related activities as well as cross-border activities by service providers) on a scale not seen since January 2023.

Manufacturing output meanwhile edged back into growth after slipping into decline in March, though the expansion was only marginal.

Whilst new orders placed at factories rose at a slightly increased rate, linked to higher domestic orders, the increase was only modest and curbed by a marked fall in export orders. While tariffs had in some instances reportedly helped drive new sales to domestic customers, trade policy was widely linked to falling foreign sales.

Sentiment among companies about their output over the coming year fell for a third successive month, dropping sharply to register the least optimistic outlook since July 2022. The latest reading was the joint-second lowest since September 2020, surpassed only by October 2022.

Sentiment about the future was relatively more resilient in manufacturing than services, as factories often reported hopes of positive impacts from government policies such as recent trade protectionism measures. Factory confidence nonetheless fell to its lowest since last August amid concerns over higher costs, supply constraints, weaker economic growth, and falling demand from export customers.

Service sector optimism also cooled, sliding further from December’s one-and-a-half year high to its lowest since October 2022. April saw growing numbers of companies cite concerns over government policies and the resulting economic uncertainty.

As with manufacturing, the number of service providers expecting output to rise over the coming year continued to exceed those reporting a decline, though in both cases the resulting net degree of positive sentiment has fallen well below long-run averages to signal subdued confidence levels.

Employment rose slightly in April, up for the fourth time in the past five months, albeit registering a smaller gain than in March and a much-reduced rate of hiring compared to the strong 31-month high seen at the start of the year. Although a modest net increase in payroll numbers was recorded across the service sector in April, manufacturing jobs were cut for the first time since October.

Hiring was often restricted by concerns over the economic outlook and demand environments both at home and in export markets, with rising cost concerns and labor availability also cited as restricting factors.

Average prices charged for goods and services rose in April at the sharpest rate for 13 months, increasing especially steeply in manufacturing (where the rate of inflation hit a 29-month high) but also picking up further pace in services (where the rate of inflation struck a seven-month high).

Higher charges were attributed to rising costs, linked widely in turn to tariffs, rising import prices, and increased labor costs. Input costs in the manufacturing sector rose at a pace not seen since August 2022, as suppliers pushed through price hikes linked to tariffs, supply concerns and a weakened exchange rate. Service sector costs meanwhile rose at a slower rate than in March, though the increase was the second-largest recorded over the past six months as higher raw material prices were accompanied by upward wage pressures.

The S&P Global Flash US Manufacturing PMI edged up from 50.2 in March to 50.7 in April, remaining above the 50.0 no change level for a fourth month in a row, yet signaling only a marginal improvement in business conditions for a second consecutive month.

Factory production moved back into expansion territory after a brief decline in March, and new orders growth ticked higher from the modest gain signaled in March. Longer delivery times – which are typically associated with busier manufacturing supply chains – were also again reported, albeit to a slightly lesser degree than in March. However, employment fell for the first time since last October, acting as a drag on the headline PMI index. Inventories of inputs were unchanged.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

(…)
“Output rose in April at its slowest pace since December 2023, indicating that the US economy is growing at a modest annualized rate of just 1.0%. Manufacturing is broadly stagnating as any beneficial effect of tariffs are offset by heightened economic uncertainty, supply chain concerns and falling exports, while the services economy is slowing amid weakened demand growth, notably in terms of exports such as travel and tourism. (…)

This PMI survey smells stagflation in both manufacturing and services. Accelerating service inflation is surprising given the sharp decline in oil prices and slowing wages.

S&P Global does not have a China flash PMI but the FT previews the May 1 PMI report:

• Chinese factories slow production and send workers home as US tariffs bite Owners say American customers have cancelled or suspended orders

(…) In interviews with the Financial Times and via dozens of social media posts, workers shared pictures of quiet production lines or factory suspension notices, highlighting how the tariffs are starting to bite.

Workers said the trade war had prompted the suspension of production for a week or more at plants making products ranging from shoe soles to jeans, electrical outlets and portable stoves. Some factory owners said they were cutting overtime or weekend work. (…)

About 15 per cent of all Chinese exports last year went to the US.

Business Inflation Expectations Increased to 2.8 Percent

From the Atlanta Fed:

• Firms’ year-ahead inflation expectations increased by 0.3 percentage points to 2.8 percent, on average.

• How do your current sales levels compare with sales levels during what you consider to be “normal” times?

• How do your current profit margins compare with “normal” times?

Since returning to Washington three months ago, Trump has toppled federal agencies, consolidated executive power, challenged global alliances and reconfigured America’s economic relationships around the globe. His moves have been met with protests, court challenges, dipping poll numbers and political opposition.

Yet so far, the only force that has reliably prompted him to back down is Wall Street. (…)

Both the president and White House officials argue that the sharp U-turns are all part of a long-term plan to force allies and adversaries alike to strike trade deals with the U.S. And they stress that Trump remains determined to follow through on his pledge to reset global trade.

But in each scenario, Trump was presented with evidence by his aides and cabinet secretaries, including Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, that holding firm on his decisions would spur further disarray in the markets, according to people familiar with the matter. Earlier this month, Trump acknowledged that he paused the tariffs in part because he watched the bond markets and people were getting a “little queasy.” (…)

Since Trump took office, the S&P 500 index is down roughly 10%, the index’s worst performance in the first 94 days of any presidential term on record, according to Dow Jones Market Data. The S&P’s data goes back to 1928. (…)

Shortly before he announced the 90-day pause on tariffs, Trump wrote on social media, “THIS IS A GREAT TIME TO BUY!!” After markets surged in response to the pause, Trump boasted that the financier Charles Schwab, his lunch guest at the White House, just made $2.5 billion off the news. (…)

Is This Trump’s Mitterrand Moment? The French President saved his government by giving up socialism. It’s a precedent for tariffs.

The WSJ Editorial Board:

President Trump continues to walk back his original tariff assault, and markets are pleased. They rose again Wednesday after Mr. Trump said he won’t fire the Federal Reserve Chairman and is likely to retreat from his highest China tariffs. Is this Mr. Trump’s François Mitterrand moment?

Readers of a certain age will recall how the French Socialist President swept into power in 1981 promising a far left agenda of government control over the private economy. The market reaction was brutal. Within a year he had put socialism on pause and by 1983 he had abandoned most of it. He went on to serve two terms.

That historic U-turn comes to mind as we watch Mr. Trump execute a reversal by stages in his tariff agenda. First he carved out space for Mexico and Canada from his reciprocal tariffs. Then he put his reciprocal tariffs on everyone except China on a 90-day pause. Then the Customs bureau gave exceptions to Apple, Nvidia and big electronics companies. Now comes word that Mr. Trump may substantially cut his 145% tariff rate on China.

That’s a long way in three weeks from the declarations by White House aide Peter Navarro and Commerce Secretary Howard Lutnick that there would be no tariff-rate changes. It’s hard to see this as anything other than a retreat amid the harsh reaction of financial markets, worries about recession and price increases, and a sharply negative reaction from the rest of the world—friend and foe.

The good news is that at least Mr. Trump is finally listening to reality. The CEOs of Walmart, Home Depot and Target paid a visit to the White House this week and told Mr. Trump prices would soon rise and store shelves might soon be empty as the tariff impact grows. This would be more than the “little disturbance” Mr. Trump warned about when he first unveiled his tariff barrage.

Financial markets have also had an impact, as they rise or fall based on the latest news about tariffs and Mr. Trump’s plans for Fed Chair Jerome Powell. There couldn’t have been a clearer market test in the last three weeks about the economic damage these columns warned about. The MAGA media echo chamber that praised Mr. Trump’s tariffs as strategic genius looks foolish.

Another harsh reality is that China called Mr. Trump’s bluff and seems to have won this round. (…)

Beijing has also warned countries not to do trade deals with the U.S. that exclude China—or else. With even U.S. allies facing Mr. Trump’s tariff assault, Beijing’s threat has resonated in a way that it never previously did. U.S. diplomatic sway is ebbing.

The question going forward is whether Mr. Trump is internalizing these economic and political lessons or merely pausing to fight his trade war another day. We doubt even Mr. Trump knows the answer, since so much of his decision-making is ad hoc. He’ll keep his universal 10% tariff in any case.

But if the President is looking for political advice, he could do worse than check out the polling cited nearby by Mark Penn and Andrew Stein. It shows that the public largely opposes his tariffs, whose damage poses the single biggest threat to his Presidency. Better to heed the polls and the verdict of Adam Smith, and take the Mitterrand path to political survival.

John Authers:

(…) There is much to debate over exactly how much the president conceded, but the key point as far as Mr. Market is concerned is that he’s shown that there is indeed a “Trump Put” — an option that allows investors to limit their losses if shares fall. The strike price is lower than had been hoped, but the key is that Trump has shown that when challenged, he blinks. (…)

Despite the relief at signs that they can bully the president, investors are still plainly unhappy, and the direction of travel for the market from here is not clear. That’s in large part because the U-turns could be more complete.

Trump wants tariffs on China to be “substantially lower,” but not negative, while Scott Bessent then assured everyone that the cuts won’t be unilateral. In other words, the administration wants to make a deal to reduce tariffs from their current absurd level, which we knew already. The shift in rhetorical tone is important; far more precision is needed before we can lift the uncertainty.

That’s problematic because uncertainty in itself inhibits economic activity and money-making. The Federal Reserve’s regular Beige Book, a collation of anecdotes and observations from the different branches’ contacts with business, illustrates the problem neatly. The latest, published Wednesday, is dominated by the uncertainty created by tariffs. Oxford Economics keeps this handy breakdown of the themes that dominate each edition. It speaks for itself:

While tariff uncertainty persists, the risk is that it will so inhibit businesses as to drive the economy into an unnecessary recession. Once that possibility can be ruled out, then a consistent market advance could happen.

(…) while the selloffs had forced the president to dial back the rhetoric, his most recent words run counter to his lofty long-term aims of remaking American society and the economy by changing the world. With decision-making evidently erratic, Shvets predicts “rolling chaos over years to come.”

If you can’t rely on a Trump Put with a fixed strike price, then predicting a change in policy requires knowledge of, first, the Kremlinology of who has the president’s ear at any one time (should we listen to Bessent? Navarro? who?), and, second, the state of the president’s mind.

Investors know virtually nothing about either. That shrouds future moves with uncertainty and effectively forces them to show more caution, or in more technical terms to demand greater risk premia and therefore lower prices. (…)

While financial markets got into risk management since mid-February and particularly since Liberation day, one can bet that the Trump administration will also gear up towards risk management seeing charts like this one:

Is there anyone still thinking there is a grand, well thought out plan behind all the announcements of the past 2 months?

They are not done yet:

US Officials Mull Easing Tariffs Targeting the Auto Industry

The Trump administration is considering whether to reduce certain tariffs targeting the auto industry that carmaker executives have warned would deal a severe blow to profits and jobs.

One measure would spare automobiles and parts already subject to tariffs from facing additional duties from levies on steel and aluminum imports, according to people familiar with the matter. That would eliminate so-called “stacking” of levies.

Another option being studied would fully exempt auto parts that comply with the US-Mexico-Canada trade pact, known as the USMCA, some of the people said. Those components don’t currently face tariffs, but the administration had planned to tax the non-US share of those parts from Canada and Mexico. Fully sparing those parts would abandon that approach, which would present a potentially herculean logistical challenge.

The Financial Times earlier reported that the Trump administration is considering reducing tariffs on auto parts — and that they might also exempt auto parts bought from China from a 20% tariff applied to the country over a dispute over fentanyl. (…)

If adopted, the changes would be a significant reprieve for automakers who have warned of devastating consequences from the Trump tariffs, including higher vehicle prices, production cuts and potential job losses. The industry relies on deeply integrated supply chains spanning North America for the vehicles they sell in the US. (…)

In the Oval Office on Wednesday, Trump was asked if he was considering changes to auto tariffs and indicated he was not — while also suggesting he might even increase levies on the Canadian auto sector.

“No, we’re not considering it now, but at some point it could go up,” Trump said. “Because, again, we don’t really want Canada to make cars for us. To put it bluntly, we want to make our own cars, and we’re now equipped to do that.” (…)

BTW: Trump to Mark 100 Days in Trip to Michigan Autoworker Heartland

(…) “Remember, there’s no tariff when they build their plants here — and everybody wants to,” Trump told reporters in the Oval Office on Wednesday. “The higher the tariffs go, the more likely it is they come in and build a plant.” (…)

China Says US Should Revoke All Unilateral Tariffs, Denies Talks

(…) He also dismissed speculation that progress has been made in bilateral communications, saying “any reports on development in talks are groundless,” and urging the US to “show sincerity” if it wants to make a deal.

The remarks suggest that President Donald Trump’s comments this week signaling that he could lower tariffs on China — which currently stand at 145% for most goods — will not be enough to de-escalate tensions. The US leader said Wednesday that “everything’s active” when asked if he was engaging with China and that Beijing was “going to do fine” once talks had settled. (…)

The remarks from China’s MOFCOM and MOD come hours after Pan Gongsheng, governor of the People’s Bank of China, warned of the threat ongoing frictions pose to trust in the global economic system.

“All parties should strengthen cooperation and make efforts to prevent the global economy from sliding into a track of ‘high friction, low trust,’” Pan said at a Group of 20 meeting in Washington on Wednesday, according to a social media post by state broadcaster China Central Television. (…)

Pipeline to China

John Mauldin shows a chart revealing that China has been buying a lot more crude oil from Canada than from the USA lately.

You might think this is because of tariffs, but it’s really about pipelines. An expansion of Canada’s Trans Mountain Pipeline opened last May, enabling Albertan oil to reach the Pacific Coast. This is a more direct route to China than the US Gulf Coast.

Tariffs aren’t helping, though. China has a way to replace some of the oil it previously sourced from the US, while Canada has a new market for its surplus oil. The bigger question may be how long it will last. With China aggressively switching to electric
vehicles and renewable energy, its oil demand seems to have peaked and may diminish over the next decade.

What John omits to mention is that the Trans Mountain pipeline is a new gateway to Asia for Canadian crude which, landlocked, could only be sold to the U.S.. While Canada’s heavy crude deserves a discount to lighter WTI, U.S. refiners have always exploited their unique position.

But new export capacity is helping close the differential, suggesting that U.S. future crude costs will rise by $3-5/bbl.

Canada’s natural gas is in a similar position but the Canadian government is actively exploring ways to build east-west pipeline capacity to broaden export markets and reduce dependence on the U.S..

All these will contribute to a rising U.S. trade deficit with Canada…

Canadian grades represent approximately 70pc of the US midcontinent refinery feedstock.

EARNINGS WATCH

The Dollar’s Slide Is Raising Red Flags for Corporate Earnings

Rising tariffs and the weakening dollar are casting a shadow on companies’ profit guidance this earnings season, with more damage seen unfolding over the coming quarters.

Companies across Europe are already sounding the alarm following the dollar’s slide to three-year lows versus the euro and to a 10-year trough against the Swiss franc. (…)

Given that Stoxx 600 index members get 60% of their sales from overseas, such a large dollar slide is unwelcome, as it would sharply reduce the worth of US earnings once converted back into local European currencies. As a result, US-exposed stocks in the region are falling with the dollar and many investors are turning to domestically-geared firms as an alternative. (…)

“European companies will have to wake up to the idea that their price competitiveness can no longer rely on a stronger US dollar,” said Florian Ielpo, head of macro research at Lombard Odier Investment Managers.

While the current earnings season won’t capture the effect of tariffs unveiled on April 2, “the third quarter will be the eye of the storm,” Ielpo predicted. (…)

Each 5% rally in the euro and other local currencies against the dollar shaves 1.5 to two percentage points off earnings growth in the MSCI Europe gauge, Morgan Stanley strategists estimate, describing the currency moves as “a broad-based drag.” (…)

For American companies that sell abroad, dollar weakness can be a boon — shares in companies that make most of their sales outside the US, such as Coca Cola Co. and Philip Morris International Inc., have bucked this month’s stock-market rout.

Yet, only a third of revenue for S&P 500 constituents comes from overseas. For the remaining, domestic-focused companies, such as retailers, a falling greenback is usually bad news, because it raises prices for imports and erodes consumers’ purchasing power, UBS Group AG strategists note. (…)

As economic gloom deepens, strategists are cutting their earnings estimates for the year. As for the S&P 500, earnings-per-share growth is seen as 7.3%, down from 11.4% at the start of the year, data compiled by Bloomberg Intelligence shows. Meanwhile Europe’s Stoxx 600 earnings growth estimates have been cut to minus 2% from 3% in January, according to Barclays Plc strategists. (…)

The FT informs us that “While fewer than a fifth of the blue-chip stocks in the S&P 500 index had held first-quarter earnings calls by Tuesday, tariffs were cited on more than 90 per cent of them, according to FactSet. The term “recession” was mentioned on 44 per cent of calls, compared with less than 3 per cent on those covering the fourth quarter of 2024.”

The FT lists several companies quantifying the costs of Trump’s policies on their businesses.: GE Vernova: $400M, Baker Hughes: $200M, Boston Scientific: $200M, J&J: $400M, RTX: $850M, GE Aerospace: $500M. That’s $2.6B on only 6 companies. “A little disturbance” he said.

Five-Minute EV Charging Is Here, but Not for U.S.-Made Cars CATL’s and BYD’s rapid-charging technologies underscore China’s dominance in the EV sector, a technological priority for Xi Jinping

Two of the world’s leading battery developers are locked in a technological race that has brought the charging time for an electric vehicle to just five minutes—about the amount of time it takes to refuel a traditional gasoline-powered car.

And, in a twist with geopolitical ramifications, both of the technological leaders are Chinese. It is a show of prowess that underscores just how far China has extended its global dominance over next-generation technologies, in some cases leaving the U.S. years behind.

The claimed leap forward on EV batteries is merely the latest technological feat for a country that has stunned Western governments with a string of breakthroughs on artificial intelligence, semiconductors and EVs—a vindication of leader Xi Jinping’s ambitions of turning China into a global technological powerhouse. (…)

The technologies won’t be introduced on a wide scale right away. The batteries can only be charged at a network of superfast charging stations that is still being built out.

Still, CATL’s and BYD’s technologies serve as the latest example of how China is years ahead of the U.S. in EV technology, even as the Trump administration intensifies efforts to curtail Chinese companies’ access to cutting-edge technology. (…)

CATL is now responsible for making more than one-third of the EV batteries on the global market, including those inside made-in-China Teslas.

CATL and BYD’s claimed technological advancements are unlikely to benefit American consumers, at least in the near term, given sky-high tariffs levied by the U.S. against Chinese goods—and in particular EVs manufactured in China. (…)

In March, 52% of passenger cars sold in the country were battery-electric vehicles, plug-in hybrids or range-extended vehicles, according to the China Passenger Car Association. (…)

Chinese battery makers are leading producers of lithium-iron-phosphate, or LFP, batteries. These iron-based battery cells cost less than the nickel-and-cobalt combination used widely in North America and Europe.

CATL’s newest fast-charging battery, the second generation of its Shenxing lineup, is an LFP battery with a range of about 500 miles. CATL said it improved electron transmission efficiency to avoid overheating during rapid charging. (…)

China has more than 13 million EV-charging facilities nationwide, counting both publicly and privately operated ones, state media has reported. The U.S. has around 77,300 charging locations with about 230,000 EV-charging points in total, data from the Joint Office of Energy and Transportation showed. It is unclear if the two figures are directly comparable, but industry experts widely regard China’s EV-charging environment to be far ahead of the U.S.’s.

Separately on Monday, CATL introduced a new sodium-ion battery that it calls Naxtra. At the moment, mainstream EV batteries are reliant on lithium, creating a potential bottleneck around supplies of the material. CATL says sodium-ion batteries, if mass-produced, could help reduce its dependence on lithium.

Sodium-ion batteries are made from a sodium compound called soda ash, which can be produced using table salt. Unlike lithium, sodium is easily accessible everywhere. The U.S. has also been working on developing this technology.

• Tesla Sales Slumped Again in EU Last Month Decline stands in contrast with a 17% increase in registrations for battery-electric vehicles

(…) New-car registrations for Tesla models, a reflection of sales, logged a 36% slump in March to 18,224 vehicles, according to the European Automobile Manufacturers’ Association, an industry body. The March contraction came after Tesla recorded a 47% slump in February registrations and a 50% drop in January.

Tesla’s latest decline stands in contrast with a 17% increase in overall registrations for battery-electric vehicles across the EU in March, 24% growth for hybrid-electric cars and 12% growth for plug-in-hybrid models. (…)

Trump Says Millionaire Tax Would Push Wealthy to Leave the US

(…) “I think it would be very disruptive because the millionaires would leave the country,” Trump told reporters in the Oval Office on Wednesday. “Other countries that have done it have lost a lot of people. They lose their wealthy people. That will be bad because the wealthy people pay the tax.” (…)

How about this disruption?

75% of US scientists who answered Nature poll consider leaving More than 1,600 readers answered our poll; many said they were looking for jobs in Europe and Canada.

More than 1,200 scientists who responded to a Nature poll — three-quarters of the total respondents — are considering leaving the United States following the disruptions prompted by Trump. Europe and Canada were among the top choices for relocation.

Up the Down Trump Tariff Escalator Markets rally on Bessent’s optimism about a U.S.-China trade truce.

Do you think the markets are trying to tell President Trump something? Stocks and the dollar rose Tuesday after word leaked that Treasury Secretary Scott Bessent told a private investor conference that he expected trade tensions between the U.S. and China to ease soon.

The main equity indexes regained most of their losses from Monday after various media sources confirmed the Treasury secretary’s optimism that both China and the U.S. don’t want the current all-out trade war to continue. He also reportedly said Mr. Trump’s goal in imposing 145% tariffs on imports from China wasn’t to totally decouple the two economies.

If Mr. Bessent knows what Mr. Trump’s real China and trade strategies are, everyone would love to hear it because so far it looks like ad hoc improvisation. But we—and the markets—will take whatever good news we can get these days. So would businesses across the country that are freezing investment or not hiring as they try to figure out what will happen when Mr. Trump’s 90-day pause on his highest non-China tariffs ends. (…)

If Mr. Bessent can move markets merely with comments that a trade truce is coming, imagine how they’d respond if Mr. Trump simply called the whole tariff thing off.

• Trump Says He Has ‘No Intention’ of Firing Fed Chair Powell President also says China tariffs ‘will come down substantially’

President Trump said he is not planning to fire Federal Reserve Chairman Jerome Powell and he signaled that tariffs on China could be lowered, prompting relief from investors who had been spooked by the White House’s aggressive moves in recent weeks.

“I would like to see him be a little more active in terms of his idea to lower interest rates…but, no, I have no intention to fire him,” he told reporters in the Oval Office. (…)

Trump’s softer tone on Powell came after he lashed out at the Fed chair, writing on social media last week, “Powell’s termination cannot come fast enough!” (…)

“This is a perfect time to lower interest rates. If he doesn’t, is it the end? No. It’s not,” Trump said.

Trump has privately raised the possibility of firing Powell to advisers in recent months. Last week, he expressed confidence that he had the authority to oust Powell. “If I want him out, he’ll be out of there real fast, believe me,” Trump said. And he renewed his criticism of Powell on Monday. Trump’s social-media posts about Powell have triggered market volatility.

Trump’s public attacks on Powell unnerved some of his advisers, who made the case to the president that attempting to fire the Fed chair would result in a market downturn and prompt a messy legal fight, according to people familiar with the matter. (…)

In the Oval Office on Tuesday, the president also said 145% tariffs on China are “very high.”

“It won’t be that high,” Trump said. “It will come down substantially. But it won’t be zero. It used to be zero.” (…)

And now, ladies and gentlemen, at the count of three, I will snap my fingers and we will all wake up. T’was just a bad dream, sorry for the rather minor inconveniences to all of you around the world…

We will now attempt to return to our regular programming.

John Authers:

(…) it would be unwise to think of this as a true turning point. Raising the possibility of firing Powell was an unforced error in the first place, and the messaging suggests chaos. The White House press secretary had amplified Trump’s criticism only hours earlier, while the actual announcement of hugely important market-sensitive information came ad hoc in response to a reporter’s question. Would the issue have been cleared up without a question?

A further reason this shouldn’t do much to restore confidence that the administration knows what it’s doing is that there’s a clear alternative waiting in the wings. Powell has to go next year anyway. The obvious replacement is Kevin Warsh, a former Fed governor and investment banker. (…)

Warsh would represent that rare combination of genuine change with the stability of continuity. And he probably wouldn’t meekly cut rates just because the president asked him to. Which is good. (…)

If the administration really wants to change the Fed, it can wait until next year with a new man in place.

Understanding Trump’s Trade War

By Holman W. Jenkins, Jr

(…) Whatever he thought was going to happen with his tariff announcement, it didn’t, and President Trump is in planless improvisation mode now. But the episode is also of a piece with every other move in his early administration, aimed at exciting conflict, sticking a thumb in the eye of an establishment whose policies he has long criticized (without really understanding them) and, more importantly, that he believes wants his destruction or impoverishment.

The world now faces a known unknown. It may be months or years before a comfortably intelligible trade-policy equilibrium is re-established. (…)

By now, Mr. Trump has been through five presidential or midterm elections, each decided by a rounding error, usually in favor of his opponents. So he expects, after next year’s midterms at the latest, that the death struggle with Democrats will resume. Impeachment will follow. He’s ready for it.

From a 30,000-foot level, Americans have obviously been badly served by importing banana-republic dynamics into our politics. But here we are. (…)

A column like today’s is a hard sell to newspaper readers used to the comfortable illusion that presidents are primarily focused on their carefully considered policies and how they will benefit the country. (Witness the hopeless piling up of commentary seeking the “strategy” in his trade actions.) (…)

But we still have to cope with Mr. Trump’s acts in office. In one sense, his presidency is but a culmination of a succession of presidencies incapable of finding America’s national interest in the welter of signs and events. George W. Bush’s disappeared down the rabbit hole of the global war on terror, Barack Obama’s down the rabbit hole of a woke rectification of sinful America. Joe Biden’s “Build Back Better” fantasy foundered on the delusion that there was something FDR-like about him and his moment.

The challenge is America’s place in a world of one or more powerful states with which we are simultaneously essentially at war but also inextricably interdependent. This world isn’t as unfamiliar at it looks. The model for existing in such a world, if not for the prior claim of retirees and other federal beneficiaries on most of the national revenue, would be Theodore Roosevelt’s talk softly and carry a big stick.

From a policy view, the worst effect of Mr. Trump’s trade sidetrack is the failure quickly to rebuild America’s military deterrence power.

China Signals That Door to U.S. Trade Talks Is Open, But Not Under Duress

“China’s attitude towards the tariff war launched by the U.S. is quite clear: we don’t want to fight, but we are not afraid of it. If we fight, we will fight to the end; if we talk, the door is wide open,” foreign ministry spokesperson Guo Jiakun said at a daily press briefing on Wednesday.

If the U.S. really wants to resolve the issue through dialogue and negotiation, it should stop making threats and engage in dialogue with China on the basis of equality, respect and mutual benefit, said Guo.

The U.S. can’t say it wants a deal while exerting extreme pressure on China, and that strategy won’t work, Guo added.

Wednesday’s comments came shortly after President Trump said that he’s not going “to play hardball” with China, and that the two countries will ultimately reach a trade agreement.

Treasury Secretary Scott Bessent on Tuesday also told attendees of a closed-door JPMorgan investor gathering that he expects the trade conflict with China to de-escalate, according to people who were in the room for his remarks. (…)

The Chinese foreign ministry spokesperson also remarked on the U.S.’s recent efforts to reassert control over the Panama Canal.

“No lies can cover up the U.S.’s ambition to control the Panama Canal,” Guo told reporters on Wednesday, urging the U.S. to stop interfering with China’s exchanges and cooperation with Latin American countries. including Panama.

Bloomberg:

Trump added that “we’re going to be very nice and they’re going to be very nice, and we’ll see what happens.”

Trump also said he didn’t see the need “play hardball” with Chinese leader Xi Jinping and that during discussions he wouldn’t raise Covid-19 — an issue that is politically sensitive in Beijing. The White House recently launched a website that suggested the virus came from a lab in China, irking the nation’s diplomats. (…)

Xi still hasn’t spoken to Trump since his US counterpart returned to office, with no public indication that talks between the world’s largest economies are taking place, even at lower levels. (…)

Foreign Minister Wang Yi told his counterparts in the UK and Austria that China’s stance toward the US aims at not only “safeguarding its own interests, but protecting international rules and multilateral trade system.” China’s premier, Li Qiang, reportedly wrote a letter to Japanese Prime Minister Shigeru Ishiba this week, calling for a coordinated response to Trump’s tariffs. (…)

Trump “chickening out” was among the top trending topics on China’s Weibo social media website on Wednesday. (…)

Still, the Treasury chief said a comprehensive deal could take two to three years to hammer out. He also reiterated his view that China has stifled its consumer economy and favored manufacturing at the US’s expense, saying that any agreement would require a rebalancing of trade that allowed the US to increase manufacturing.

Negotiations with China over such a deal haven’t started yet, he said.

Beijing has sent People’s Bank of China Governor Pan Gongsheng, his deputy, Xuan Changneng, and Finance Minister Lan Fo’an to Washington, which this week will host meetings of the World Bank Group and International Monetary Fund. That could create an opening for top Chinese and American officials to exchange views and open the door to trade talks.

Also, one key member to the Chinese team that will negotiate with the Trump administration was likely put in place last week, when Li Chenggang was appointed vice commerce minister and trade envoy. (…)

How Are Imports from China Used in the US?

Thirty-seven percent of US imports from China are intermediate goods that are used in US production—such as in the machinery, tool, and auto industries—see chart below. In addition, small and medium-sized enterprises account for 41% of imports from China.

The bottom line is that imports from China are not only t-shirts, shoes, and TV monitors purchased by US consumers. Almost 40% of imports from China are intermediate goods used in US production.

As a result, a dramatic increase in tariffs on China will also increase US companies’ costs of production.

Japan Must Correct Trump’s False Data for Trade Talks, Kono Says

Before Japan can proceed with trade talks with Washington, authorities must first correct several misunderstandings held by President Donald Trump, former foreign minister and previous digital transformation minister Kono Taro said Wednesday.

“President Trump could flip according to how the market reacts to it and what he’s quoting, the facts, numbers, are quite wrong. So we need to first correct his misunderstanding to put our proposal on the table,” Kono said in an interview with Shery Ahn on Bloomberg TV. (…)

A Japanese delegation is expected to hold its second round of trade talks with their US counterparts later this month, while Minister of Finance Katsunobu Kato is set to meet US Treasury Secretary Scott Bessent this week.

“We definitely need to finish this negotiation, but we shouldn’t rush in,” Kono said. (…)

“We need to be very careful about economic security issues, and the supply chain involving China,” he said. “How we are going to trade, how we are going to do to China collectively among the West, that is also a separate issue.”

A Japanese delegation is in Beijing this week, where Tetsuo Saito, the chief of the ruling party’s junior coalition partner Komeito, was set to deliver a letter from Prime Minister Shigeru Ishiba to Xi Jinping. The gesture highlights Japan’s desire to balance managing its relationships with China, its largest trading partner, and with the US, its sole formal security ally.

The Composite Purchasing Managers’ Index by S&P Global fell to 50.1 from 50.9 in March, remaining narrowly above the 50 threshold separating expansion from contraction, data Wednesday showed. Analysts had predicted a drop to 50.2.

The deterioration was largely down to Germany, whose own main PMI gauge unexpectedly declined to less than 50 for the first time in four months. France also missed analyst estimates, remaining stuck beneath that level. Both of Europe’s two biggest economies saw surprise weakness in services. (…)

“A faster drop in new business suggests this weakness might stick around for a while. However, the higher fiscal spending on infrastructure in Germany and defence spending across Europe should eventually benefit not just manufacturing but also the service sector, though with a bit of a lag.” (…)

“Costs have risen at a similar rate to March, but the increase in selling prices has slowed significantly,” he said. “Goods prices are showing mixed behaviour: input prices have reversed their inflationary trend of the past four months and have fallen, while output prices have increased a bit more than in March but still modestly.” (…)

There is more important info from the Flash PMI release:

• Companies were generally reluctant to expand output given a further reduction in new orders during April, the eleventh in as many months. Moreover, the latest decline in new business was the most marked in the year-to-date. Contractions were seen across both the manufacturing and services sectors. New export orders (which include intra-Eurozone exports) also decreased, and at a broadly similar pace to that seen for total new business. New export orders have decreased continuously since March 2022.
• After having risen for the first time in eight months during March, employment broadly stagnated in April. A solid reduction in manufacturing staffing levels outweighed a modest and slower increase in workforce numbers in the service sector. Continued falls in employment in the largest two Eurozone economies cancelled out job creation elsewhere.

From the Japan Flash PMI:

“Indices measuring new business inflows, which are helpful to gauge near-term output trends, also continued to diverge at the sector level. Factories saw new orders decline at the steepest rate in over a year amid a stronger deterioration in foreign demand, as well as reports of subdued client spending and concerns over tariffs. In contrast, services companies reported the strongest rise in new work since January. (…)

Notably, overall optimism regarding the one-year outlook for output fell to the lowest level since the initial wave of the COVID-19 pandemic in August 2020.”

CONSUMER WATCH

Credit-Card Companies Brace for a Downturn

(…) JPMorgan Chase and Citigroup added money to their rainy day funds to cover expected future losses. Retail-card issuer Synchrony is tightening its lending standards. U.S. Bancorp is chasing a more affluent customer base that could better withstand a downturn. (…)

There are some early warning signs. Consumers are holding off on nonessential splurges such as vacations. Executives at American Express and Citigroup said that travel and entertainment spending lost momentum in the first quarter, while spending in less discretionary categories picked up. The share of cardholders making only the minimum payment is running above prepandemic levels, Capital One said Tuesday.

Bank executives said consumer spending has remained strong in the first few weeks of the current quarter.

“Consumers are still solidly in the game,” Bank of America chief Brian Moynihan told investors last week.

Sustained spending levels in April appear driven more by confidence than panic, card issuers said. Though retailers that offer Synchrony cards started running marketing campaigns to induce purchases before price increases went into effect, so far the impact hasn’t shown up in the data, chief executive Brian Doubles told investors. The store-card issuer’s weekly sales remained relatively flat through early April. (…)

The top 10% of earners now account for roughly half of all U.S. spending, according to government data.

On the other end of the market, credit is becoming harder to get. Synchrony reported a 3% drop in active accounts and a 4% decline in purchase volume in the first quarter, as it pulled back from riskier borrowers with lower credit scores.

Meanwhile, issuers that already cater to high-income consumers are seeing steadier performance. American Express reported a 7% increase in U.S. consumer spending in the first quarter, and said that trend continued in the first 12 days of April. (…)

Bank of America’s credit and debit card data show a marked slowdown in wage growth this year:

Bank of America credit card data reveals a growing divergence for consumers. Six percent more households are consistently paying off all of their credit card debt each month compared to 2019, but a smaller share of “revolvers” may be relying more on credit to maintain their spending levels.

The share of those consumers who carry a credit card balance from month to month (aka “revolvers”), has declined both YoY and compared to 2019 levels for all income cohorts (Exhibit 6). While some consumers may be paying off their balances to avoid higher interest payments as rates remain higher for longer, it could also be that some consumers are in a better financial position than they were pre-Covid. Taken together with elevated deposits, in our view, this suggests most consumers have some capacity to “tap” into savings or credit to increase their spending if need be.

But among those that do carry a balance, card utilization rates are higher compared to pre-2019 levels. Perhaps unsurprisingly, lower-income households are using their credit cards more than any other income group – around four times more than middle- and higher-income households compared to pre-Covid levels. Additionally, while there was some seasonal drop in credit card utilization from January to March, it continued to rise YoY for those with lower incomes. Meanwhile, utilization rates were flat YoY among those in the middle- and higher-income groups.

And according to Bank of America credit card data, while early stage (30-day) delinquencies have increased slightly YoY in March, they have declined over the past 6 months.

While many consumers remain in good financial shape, they may be cutting back on “nice to have” discretionary spending like travel and leisure activities in order to do so (read more about this topic in the April Consumer Checkpoint). In our view, this may partially reflect easing wage growth and the rising cost of living. Consequently, is this slowdown in discretionary services affecting employees in these industries? We think so.

While average hourly earnings are still increasing among companies in these industries, it is at a much lower rate than four years ago, according to data from the Bureau of Labor Statistics. Additionally, these employees have generally been working fewer hours over the past two years, which is partially offsetting any YoY pay increases.

In fact, we have largely seen a slowdown in average weekly YoY earnings growth for both the retail and leisure and hospitality industries over the past four years (Exhibit 10). And while there was a small increase in retail employees’ average hourly earnings YoY as of March, it was potentially temporarily boosted by heightened demand as consumers tried to get ahead of tariff-related price increases.

Trump’s “empty shelves” warning

The CEOs of three of the nation’s biggest retailers — Walmart, Target and Home Depot — privately warned him that his tariff and trade policy could disrupt supply chains, raise prices and empty shelves, according to sources familiar with the meeting.

“The big box CEOs flat out told him [Trump] the prices aren’t going up, they’re steady right now, but they will go up. And this wasn’t about food. But he was told that shelves will be empty,” an administration official familiar with the meeting told Axios.

Another official briefed on the meeting said the CEOs told Trump disruptions could become noticeable in two weeks.

CEO Gloom Rivals Financial Crisis as Tariffs Hit S&P 500 Stocks

Not since the financial crisis has Corporate America been so downbeat about the state of the economy in earnings calls, an ominous sign for investors trying to figure out how much more pain Donald Trump’s trade war will inflict on the stock market.

The ratio of positive to negative comments on macroeconomic conditions during this reporting season has dropped well below its average and is on track for the worst proportion since 2009, according to a Bank of America Corp. analysis of the first conference calls. (…)

“Almost every corporate CEO is revising down their outlook,” said veteran market strategist Jim Paulsen. “The commentary warnings of the corporate sector have escalated.” (…)

So far in the current quarter, 27% of the firms in the S&P 500 Index have cut their guidance for 2025 while only 9% have increased their outlook, according to data compiled by Bloomberg Intelligence. (…)

Vice President JD Vance said the US has issued a “very explicit proposal” to Russia and Ukraine on a path forward to a peace deal, adding “it’s time for them to either say yes or for the United States to walk away from this process.”

“The current lines, somewhere close to them is where you’re ultimately, I think, going to draw the new lines in the conflict,” Vance told reporters in India on Wednesday, after finishing a tour of the Taj Mahal. He added that doing so would mean both Ukraine and Russia would have to give up some territory each side currently controls.

Freezing the conflict along existing battle lines would be a far greater sacrifice for Ukraine, which has sought to regain all territory in the country’s east and south seized by Russia since 2014, including Crimea, and following the February 2022 full-scale invasion.

The US is prepared to recognize Russia’s control over the Ukrainian Black Sea peninsula and to ease sanctions on Moscow as part of a potential peace deal, Bloomberg previously reported. President Volodymyr Zelenskiy said on Tuesday his country wouldn’t recognize the Russian occupation of Crimea, which is internationally recognized as Ukrainian territory. (…)

Data: ISW/CTP. Map: Axios Visuals

• Ukraine’s Zelensky Pushes Back on U.S. Peace Plan The Ukrainian president said his country would never recognize Russian control of Crimea, a key Russian demand

“Ukraine will not legally recognize the occupation of Crimea,” Zelensky said at a press conference here on Tuesday. “There’s nothing to talk about here. This is against our constitution.” (…)

In recent days, American officials had floated the idea of formally acknowledging Russian control of Crimea, the Black Sea peninsula seized by Russia’s military in 2014, while freezing the conflict along current lines. It couldn’t be established whether the idea was for the U.S. to recognize Russia’s hold on Crimea, or for Ukraine to do so as well.

American officials also said Ukraine would be kept out of the North Atlantic Treaty Organization, though it isn’t clear how that provision would be enforced. (…)

The Art of the Deal!

Officially signing away Crimea would be political suicide for any Ukrainian politician.

So far, Ukrainian officials have broadly condemned the idea as a violation of international law.

“Attempts to ‘exchange’ Crimea for a cease-fire would not bring real peace,” said Tamila Tasheva, a member of Ukraine’s Parliament and a Crimean Tatar, an indigenous people of the peninsula. “Instead, they would set a dangerous precedent—rewarding aggression, legitimizing war crimes and encouraging other authoritarian regimes to act similarly.” (…)

Official recognition of Crimea as Russian territory would be a historic win for Putin.

The peninsula, which juts into the Black Sea from southern Ukraine, has long been a target for Putin. He denounced the decision to transfer control of Crimea from Russia to Ukraine in 1954, when both countries were part of the Soviet Union. In 2014, he dispatched Russian troops in unmarked uniforms to take control of the territory, marking the start of his invasion of Ukraine.

More recently, the peninsula served as a staging ground for Moscow’s full-scale invasion in 2022, with tanks rolling in from Crimea to occupy parts of the Kherson and Zaporizhzhia regions.