TARIFFS
The Court of International Trade ruled that the Trump administration does not have authority under the statute that it cited (IEEPA) to implement the retaliatory tariffs announced on and since April 2 and the tariffs on Mexico, Canada and China related to fentanyl flows. Equity markets rallied on this news. The next day an appeals court temporarily stayed the lower court’s order to rescind these tariffs pending a hearing of the Trump administration’s appeal. Separately, President Trump on social media accused the Chinese government of violating the agreement reached in Switzerland two weeks ago that significantly reduced tariff levels between the U.S. and China.
Our Take: Expectations around the ultimate level of restrictiveness of trade policy under the Trump administration are being whipsawed back and forth on almost a daily basis. Even if tariffs and trade restrictions end up at levels that are not as disruptive as those announced on April 2, the level of uncertainty around trade policy could easily cause enough businesses and consumers to pull back on purchases and hiring to push the U.S. into a recession.
U.S. ECONOMY
First quarter GDP was revised up 0.1% from -0.3% to -0.2%. Underneath the small change in the headline number was a -0.41% revision in consumption driven mostly by services and a 0.38% revision upward in inventories. April personal incomes rose 0.8%, while inflation-adjusted spending slowed to 0.1% from 0.7% in March. Core consumer inflation was down 0.1% to 2.5% year-over-year, still above the Fed’s 2% target. Interest rates fell slightly on increased expectations for Fed easing.
Our Take: First and second quarter GDP should be viewed together to smooth out the impact of increased imports and inventory builds as firms tried to make purchases ahead of tariffs. The same is true of consumer spending. The Fed is unlikely to ease without much greater clarity around the persisting impact of policy changes on growth, employment and inflation.
TREASURIES DOWNGRADE
Moody’s downgraded U.S. government debt (Treasuries) from Aaa to Aa1, removing the last AAA/Aaa rating from the three major ratings agencies. Moody’s cited years of unsustainable fiscal policies from multiple administrations and no clear plan to address this. The yield curve steepened, especially beyond 10 years.
Our Take: Most market participants view agency ratings of Treasuries as essentially meaningless. The Moody’s downgrade may have driven a slight increase in the term premium for longer maturities, but this was also concurrent with the release of more details of the budget bill.
FED
This week the Fed released the minutes from the May FOMC (Federal Open Market Committee) meeting. While the committee maintained a generally positive view of current economic conditions, the minutes show an increased level of uncertainty regarding the impact of changes in economic policy under the new administration, particularly tariffs. FOMC participants noted that tariff increases announced so far had been “significantly larger and broader” than anticipated. There was also considerable uncertainty regarding “the scale, scope, timing, and persistence” of economic effects associated with changes in trade policies, as well as the impact of changes to other fiscal, regulatory, and immigration policies. Overall, participants described the uncertainty surrounding the economic outlook as “unusually elevated.” Separately, Chair Powell met with President Trump at the White House. The president told Powell that the Fed should be lowering rates, and Powell responded by stating that the Fed would act in service of its mandates based on incoming data.
Our Take: Given the heightened uncertainty at the Fed, it is no surprise policymakers kept rates unchanged. The Fed remains focused on a careful, data-driven approach to policy normalization and appears willing to hold its target rate steady as it assesses the impact of the administration’s policies.
MUNICIPALS
Colleges and universities have borrowed more than $17 billion of municipal debt so far this year according to Bloomberg. This marks the largest issuance since at least 2014. Besides issuing municipal bonds, some institutions have issued taxable debt or taken out private loans this year.
Our Take: Many institutions are taking steps to protect themselves in case their amount of federal funding decreases. Besides issuing debt, some universities have made changes to personnel levels by enacting hiring freezes and offering buyout packages to employees. Some institutions have increased the number of admitted students to gain additional tuition revenue.