More than Just a Pre-Tariff Shopping Spree Despite Wilting Sentiment, Q1 Consumer Spend Now Looks Less Dreary
Worries about tariffs may be weighing on confidence and lowering expectations to levels not seen since the financial crisis, but you’d be hard-pressed to find evidence of that in today’s retail sales report. Retail sales jumped 1.4% in March and while some gain is attributable to a pull-forward in demand ahead of tariffs, the underlying details suggest consumers are still spending.
Yes, some households are getting major purchases in before tariffs bite. The biggest gainer in today’s report is autos (+5.3%) where vehicles are moving off dealer lots faster than at any time since the post-pandemic demand surge earlier this decade. Households are also hitting up their local garden supply & building material stores where receipts grew 3.3% in March.
So yes, consumers are playing a bit of beat-the-clock with tariffs, but there is more to the story here. It may be difficult to reconcile, but once again, consumer spending is managing to avoid the gravitational pull of all the negative dynamics that might otherwise hold it back.
Recall that the worst of the recent equity market volatility did not take place until April. March was simply a strong month for retail sales. (…)
After the volatile start to the year, control sales rose a trend-line 0.4% in March, which tells us consumers keep spending. This should provide some support for first quarter spending and suggests even as consumers have front loaded some big purchases, they’re still spending on retail.
Consumers also spent more at restaurants in March, and we’re not aware of a way you can front-run tariffs with a nice night out. Sales at food services & drinking places leaped 1.8%, a key signal that while spending may be slowing consumers have not gone into hiding when it comes to discretionary spending. We don’t read too much into the pullback in gasoline sales, which looks mostly price related.
How consumers act in these next couple of months will be telling. To the extent recent strength is due to a conscious pull-forward in demand, we may be due for some serious payback in April and May. A household that bought a car in March ahead of tariffs, likely isn’t buying another one in May. In fact the new car payment might curtail spending in other categories. (…)
Source: U.S. Department of Commerce and Wells Fargo Economics
Americans got a nice energy break in March as CPI-energy dropped 6.1% MoM after –0.9% in February. In particular, gasoline prices are down 7.3% in the last 2 months, freeing much pocket change ahead of tariff impact.
The boom-bust in progress seems world-wide:
(…) companies around the world rushed to bring forward their deliveries to the U.S. to avoid any surcharges, temporarily boosting manufacturing output and leading to a sharp increase in exports of goods to the United States. (NBF)
Powell Warns of ‘Challenging Scenario’ for Fed as Trade War Rages Sees strong likelihood that consumers face higher prices while unemployment rises because of tariff increases
Federal Reserve Chair Jerome Powell warned that the central bank could have less flexibility to quickly cushion the economy from the fallout of President Trump’s trade war, sending stocks down on Wednesday.
Powell said he saw a “strong likelihood” that consumers would face higher prices and that the economy would see higher unemployment as a result of tariffs in the short run.
This would create a “challenging scenario” for the central bank because anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa, he said. “It’s a difficult place for a central bank to be, in terms of what to do,” Powell said during a moderated discussion at the Economic Club of Chicago.
In some ways, the Fed’s problem resembles that of a soccer goalie who must decide whether to dive to the right and focus on inflation or to the left and address weaker growth as an opponent takes a penalty kick. “We’ll make what will no doubt be a very difficult judgment,” Powell said. (…)
Powell also hinted that the central bank could give priority to its inflation goal over its labor-market mandate if the two were in conflict. The Fed would attempt to balance the two goals, “keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans,” he said.
The Fed’s focus, he said, will be to ensure that any one-time increases in prices from tariffs don’t fuel more persistent price increases. (…)
Powell pointed to carmakers and their assembly chains as one example of economic activity that could be “disrupted significantly” by tariffs. (…) “When you think about supply disruptions, that is the kind of thing that can take time to resolve and it can lead what would’ve been a one-time inflation shock to be extended, perhaps more persistent.” (…)
“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” (…)
(…) The Federal Reserve often uses the power of the jawbone and what it says matters a lot. If people react to a warning, the Fed can even have its desired effect without needing to do anything. Because central bankers have to mind their words, mere choice of subject can be most significant.
For a prime example, Fed Chair Jerome Powell triggered a big afternoon selloff by talking frankly — but without saying anything anyone didn’t know — in a discussion at the Economics Club of Chicago. He admitted that there “isn’t a modern experience for how to think about this:”
Our obligation is to keep longer-term inflation expectations well-anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension
More or less everyone is alive to the risk that tariffs could both raise inflation and lower growth, and hammer both sides of the Fed’s mandate. The fact that Powell said so, however, along with the explicit assertion that higher prices due to tariffs might push up inflation expectations, was a sign that he wouldn’t resort to rate cuts at the first sign of trouble. He might easily have dropped such a hint — and many traders were furious with him for not doing so.
Trump says Powell’s “termination can’t come fast enough”
It’s the strongest suggestion yet of the president’s intentions to try to fire the nation’s most powerful economic policymaker. It comes on the heels of the Fed chair saying tariffs would reignite inflation and slow economic growth.
“The ECB is expected to cut interest rates for the 7th time, and yet, “Too Late” Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete “mess!,” Trump posted on Truth Social.
Powell’s term as Fed chair ends in May 2026. He was initially nominated by President Trump in 2017, and appointed to another four-year term by Biden in 2022.
NY Fed Survey of Service Firms
Survey conducted April 2-9.
Business activity in the New York-Northern New Jersey region fell at a substantial pace for a second consecutive month, according to the April survey. The headline business activity index came in at -19.8. Twenty-one percent of respondents reported that conditions improved over the month while 41 percent said that conditions worsened.
The business climate index fell nine points to -60.7, its lowest level since early 2021, with two-thirds of respondents saying that the business climate was worse than normal.
The employment index moved up to 1.3, indicating that employment levels were little changed. The wages index held steady at 34.8, a sign that wage increases remained moderate.
After rising to its highest level in nearly two years in March, the prices paid index was little changed at 57.6. The prices received index edged down to 26.0. The supply availability index fell nine points to -11.7, suggesting supply availability declined.
After plunging twenty-five points last month, the index for future business activity sank another twenty-three points to -26.6, its lowest reading since April 2020, indicating that firms expect a significant decline in activity in the months ahead.
The index for the future business climate also fell twenty-three points, to -50.0, marking its lowest level since 2009 and suggesting the business climate is expected to remain considerably worse than normal.
The future employment index turned negative. The future supply availability index dropped to -36.1, with 44 percent of firms expecting supply availability to be worse in six months. Capital spending plans turned sharply negative.
Forward looking charts:
Note that both Current and Expected Business Activity are at mid-2008-09 recession levels. This is services, only indirectly impacted by tariffs.
Tariffs Risk Higher Costs at New US Nuclear Plant, Says Builder
What the Weak Dollar Means for the Global Economy Currency’s dramatic slide will hit overseas exporters and raise pressure on central banks to cut interest rates
(…) The dollar decline has been historic, with the ICE U.S. Dollar Index, a measure of the greenback against a basket of currencies, slipping 8% this year, the worst start to a year in the index’s four-decade trading history. (…)
“For exporters, you’re not getting the currency eroding some of the tariff impact for the end U.S. consumer,” said Derek Halpenny, the London-based head of global markets research for the Japanese bank MUFG. “It has a bigger negative impact for sure.”
A weak dollar makes the profits that foreign companies earn from their U.S. divisions worth less when translated back into euros or yen. It also makes the goods they produce more expensive for American consumers.
Japan’s Toyota is expected to face an earnings hit from the yen’s climb to 143 per $1 from 157 at the start of the year. For years, the weakness of the yen has been boosting profitability at Toyota and other large Japanese exporters. (…)
Deutsche Bank cut its earnings forecasts for companies in the Stoxx Europe 600 index to 4% from 6%, citing weakening demand and the strength of the euro. The bank warned it could shave another percentage point of its growth forecast if the euro stays at its current level. (…)
Economic textbooks teach that foreign currencies tend to weaken when economies are hit with tariffs, helping to make goods cheaper to offset the cost of the levies.
Instead, investors have reacted to Trump’s back-and-forth trade policies by dumping U.S. assets, unwinding huge bets they made in recent years on the idea that the U.S. would economically outshine the rest of the world. As investors sell U.S. dollar assets, they recycle them into home currencies, pushing up their value. (…)
The currency reversal will likely mean fewer and lighter-spending American tourists (…).
The European Central Bank and Bank of Korea are both expected to deliver quarter-point reductions on Thursday. Switzerland’s central bank isn’t scheduled to meet again until June, but some investors believe it could deliver an emergency rate cut to help bring down its currency. The franc has risen more than 10% this year against the dollar, raising the specter that the country will face deflation, while also making its signature exports such as watches and high-precision machinery more expensive. (…)
Bank of Japan Gov. Kazuo Ueda said Wednesday that tariffs are moving closer to a “bad scenario” that could lead the central bank to respond.
China has let its currency move close to its weakest level against the dollar in years. Some on Wall Street worry Beijing will push the yuan even lower to offset the effects of the trade war, a move that could ripple across financial markets. (…)
China seeks reset with EU amid Donald Trump’s trade war Beijing eyes rapprochement with Brussels to compensate for loss of US market but significant hurdles remain
(…) EU leaders have also publicly expressed the need for greater co-operation, a strong contrast to previous declarations stating a need to “de-risk” supply chains from Beijing. (…)
The US tariffs will accelerate the “trend of Chinese companies going global”, said Jaromir Cernik at CTP, a big investor in European industrial property. He added that Chinese demand for factory and warehouse space in Europe was growing. (…)
“Europe’s relationship with Beijing has been plumbing new lows due to growing trade imbalances, China’s support for Russia and a rise in Chinese cyber attacks across Europe,” said Noah Barkin of the Rhodium Group consultancy. “It is difficult, given this backdrop, to envision some sort of détente between Brussels and Beijing.” (…)
Term Premium Rising
The term premium in US Treasuries is rising. The market does not know if this is because of the fiscal situation, inflation expectations becoming unanchored, or discussions about who the next Fed Chair will be.
Some of the move higher in rates has been technical, driven by unwinds of levered basis trades and swap trades.
In addition, the move lower in the dollar is telling us that the move higher in rates is also because of foreigners selling Treasuries.
For example, Japanese investors have in recent weeks been significant sellers of foreign bonds, and this has been associated with a significant appreciation of the yen relative to the dollar. This does not necessarily mean that Japanese investors are questioning American exceptionalism. In fact, in 2022, when the Fed started raising interest rates, Japanese investors were also significant sellers of foreign bonds, see second chart below.
China Stocks Face Risk of $800 Billion US Outflows, Goldman Says
US investors could be forced to offload around $800 billion of Chinese equities “in an extreme scenario” of financial decoupling between the world’s two largest economies, Goldman Sachs Group Inc. estimates.
US institutional investors currently own about $250 billion worth of Chinese companies’ American Depositary Receipts, or 26% of the total market value, Goldman analysts including Kinger Lau wrote in a note dated Wednesday. Their exposure to Hong Kong stocks amounts to $522 billion and they own about 0.5% of China’s onshore equities. Together, that amounts to more than $800 billion worth of Chinese shares.
Goldman is joining a group of global banks that have started assessing the worst outcome for investors as the once-unthinkable prospect of a financial divorce between the US and China grows with an escalating trade war. Concerns about American stock exchanges kicking Chinese firms out, which became an issue during President Donald Trump’s first term, have resurfaced after Treasury Secretary Scott Bessent’s recent comment that all options are “on the table” in trade talks with China. (…)
They estimate that in a forced delisting scenario, ADRs and the MSCI China Index could see 9% and 4% valuation drawdown from current prices, respectively.
It may take just one day for US investors to complete sales of their A shares, while it may require 119 and 97 days to exit Hong Kong stocks and ADRs, respectively, Goldman estimates.
Meanwhile, in the same extreme scenario, Chinese investors might need to unload their US financial assets, which could amount to US$1.7 trillion, they wrote, adding that around US$370 billion of which would be in equities and US$1.3 trillion in bonds. (…)
Earlier, JPMorgan Chase & Co. estimated<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> that ADR delistings could lead to removal from global indexes, resulting in aggregate passive outflows of around $11 billion.
Drug Development Is Slowing Down After Cuts at the FDA The agency is missing deadlines and not responding to biotech companies, forcing some to push back clinical trials.