Potential 50% EU Tariff Produces an Early Risk-Off Mood

• You may have thought it was safe to return to the somewhat calmer tariff waters vs. April, but you would be wrong.  With President Trump’s Friday morning declaration that Europe may be hit with 50% tariffs markets are in a decidedly risk-off mood. He also took aim at Apple; warning CEO Tim Cook that iPhones manufactured outside the United States would face a 25% tariff. That has equities set to open much lower (Dow indicated down 550 points), with Treasuries the beneficiaries of the risk-off shift. Currently, the 10yr is yielding 4.49%, down 7bps on the day, while the 2yr is yielding 3.93%, also down 7bps in early trading.

 

• The Fed rarely gets involved in discussing fiscal policy, at least in public. As Fed Chair Powell often replies when asked about it,  “we try to stay in our lane.” That didn’t stop a fellow Fed governor from adding his two cents on the subject considering this week’s events. Christopher Waller, one of the more influential governors at the Fed, said yesterday investors are likely to continue to demand higher yields in order to hold U.S. assets. “We ran $2 trillion deficits the last few years, this is just not sustainable, and so the markets are looking for a little more fiscal discipline.” And with that, the Fed has weighed in on the subject, no doubt to the chagrin of Powell, who will be the one facing any blowback from President Trump. Waller did add that all hope for a rate cut this year was not lost.  “If we can get the tariffs down closer to 10% and then that’s all sealed, done and delivered somewhere by July, then we’re in good shape for the second half of the year,” he said of rate cuts. This morning’s news may make that 10% target harder to reach.

 

• It turns out we were right to be a bit worried about Wednesday’s 20yr Treasury auction as it found tepid demand and that catalyzed selling across the Treasury spectrum and increased the angst over upcoming supply, foreign participation, a deficit-growing budget bill, and a Moody’s downgrade. With that backdrop, yesterday’s 10yr TIPS auction, provided another measure of investor demand, and perhaps surprisingly the auction went off better than the 20yr. It seems investors are interested in securing some measure of inflation protection, and in light of this morning’s tariff news that may be a decent strategy.

 

• Weekly Jobless Claims for the week ending May 17 were 227,000, a decrease of 2,000 from the previous week’s 229,000. Continuing Claims for the week ending May 10 were 1,903,000, an increase of 36,000 from the previous week’s level. The 4-week moving average was 1,887,500, an increase of 17,500 from the previous week’s revised average and is the highest level since November 27, 2021, indicating more workers are finding it more difficult to secure new employment. So, while employers continue to remain reluctant to lay off trained and experienced workers, they are definitely cutting back on hiring. Will a pick-up in weekly claims inevitably follow?

 

• The S&P Global US PMI Composite PMI Index rose from 50.6 in April to 52.1 in May. The rise in the index signaled an acceleration of activity from April’s 19-month low, although it remained one of the weakest readings seen since early 2024. The Manufacturing PMI rose from 50.2 in April to 52.3 in May, signaling the strongest improvement in business conditions since June 2022. New orders hit a 15-month high. However, the biggest contribution came from inventories, which rose to the greatest extent recorded since the survey began in 2009. Employment, however, fell for a second successive month, acting as a drag on the PMI.

 

• Meanwhile, the Services Index rose to 52.3 from April’s 50.8, a modest 2-month high. Chief Economist Chris Williamson at S&P Global Market Intelligence said: “Business confidence improved in May from the worrying slump seen in April, with gloom about prospects for the year ahead lifting somewhat thanks largely to the pause on higher rate tariffs. Current output growth has also picked up from April’s recent low, which had seen the weakest rise for over one-and-a-half years, in response to an upturn in demand. “However, both sentiment and output growth remain relatively subdued, and at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues.”

 

• Existing-home sales slowed in April. Year-over-year, sales declined in three regions and remained steady in the Northeast. Total existing-home sales – completed transactions that include single-family homes, townhomes, condos, and co-ops – slipped 0.5% from March to a seasonally adjusted annual rate of 4.00 million in April. Expectations were for sales to reach 4.10 million. Year-over-year, sales fell 2.0% (down from 4.08 million in April 2024).

 

• Total housing inventory for April was 1.45 million units, up 9.0% from March and 20.8% from one year ago (1.2 million). Unsold inventory sits at a 4.4-month supply at the current sales pace, up from 4.0 months in March and 3.5 months in April 2024. The median existing-home price in April was $414,000, up a scant 1.8% from one year ago ($406,600). Higher rates and lack of affordability have driven annual appreciation rates from 20% a couple years ago to nearly flat appreciation rates today.

 

• The final release of the week will be New Home Sales at 10am ET. Expectations are for a downshift in sales from 724 thousand annualized in March to 695 thousand in April, or down -4.0%. New home sales are based on signed purchase contracts, so it’s a more contemporaneous look than existing sales that are based on contract closings that take longer to accomplish. With rates moving higher this month, that will spell another hurdle for the housing market to navigate. In fact, if the higher yield levels stick, this will be the one sector to focus on when trying to assess the initial damage from higher rates. The housing market was already on thin ice, but with higher mortgage rates that ice gets even thinner.

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     Pick-Up in Both Manufacturing and Services PMI Linked to Tariff Front-Running

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    Higher Prices Noted Across Both Manufacturing and Services Sectors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Continuing Unemployment Claims – Near One-Year High

 

 

 

 

 

 

 

 

 

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April Existing Home Sales Fall to Long-Term Support Before May Rate Increase