Trade Tensions Ease: Wall Street Bullish, But Inflation Pressure Persists
Stock market optimism surges due to potential tariff relaxation
The US stock market closed the week on a positive note, thanks to signs of easing trade conflicts, particularly between China and the US. However, economic data suggests that tariffs imposed by President Trump are contributing to inflation.
Wall Street rose on the last trading day, fueled by optimism over trade discussions. Sluggish economic data only temporarily dampened the market's enthusiasm.
The Dow Jones Index finished 0.8% higher at 42,655 points. The S&P-500 and the Nasdaq Composite added 0.7% and 0.5%, respectively. In the NYSE, 1,916 stocks increased (compared to 1,809 the previous day), 831 decreased (959), and 61 remained unchanged. Bond yields showed a downward trend, with the yield on ten-year notes dropping 2 basis points to 4.44%.
Economy: Pressure From Government Choices
Trade disputes remain at the forefront of the market. It's rumored that the US and the European Union might discuss agricultural tariffs and other trade barriers during trade talks. Additionally, economic security and digitalization are said to be on the agenda.
Though the tariff issue isn't resolved yet, some investors remain optimistic. The strong first-quarter earnings season and the easing of trade tensions between China and the US have boosted investor confidence, according to Alexandra Wilson-Elizondo of Goldman Sachs. Despite risks, investors may have weathered most of the bad news for now.
Politics: A Blank Canvas for the US - And That's a Good Thing
Inflationary Pressure on the Rise
The prices of US imports rose more than expected in April, revealing the impact of Trump's tariffs, especially those against China. Despite the tariffs being factored in, imports still increased by 0.1% compared to the previous month. Economists were expecting a decrease of 0.4% due to lower oil prices. Without lower oil prices, imports would have risen by 0.4%. "This shows strong inflationary pressure from the tariffs," said a trader.
Economy: Higher Inflation Expected
The University of Michigan's consumer sentiment index unexpectedly fell. However, the high inflation expectations in the survey were particularly negative. Following higher US import prices, this is the second piece of bad news regarding the inflationary impact of Trump's tariffs in a day.
Boosted confidence in strong earnings and easing trade tensions between China and the US has been great for the market, according to analysts. However, concerns about inflation stemming from tariffs persist.
Mixed Results for Individual Stocks
- Boeing: After Etihad Airways ordered 28 wide-body aircraft from Boeing, the stock lost 0.2%. The new aircraft won't be operational until the end of the decade. Critics argue Boeing hasn't produced enough planes to meet demand post-crash of the 737 MAX and the Covid pandemic.
- Charter Communications shares gained 1.8% after acquiring rival Cox Communications for $21.9 billion.
- Applied Materials underperformed expectations in the second quarter but disappointed with its revenue outlook.
- Take-Two Interactive reported mixed results for its fourth fiscal quarter, with its guidance for the current fiscal year falling short of market expectations.
Dollar Recovers, Oil Prices Stabilize
The dollar rebounded slightly, with the Dollar Index gaining 0.2%. The rise in import prices and inflation expectations suggests that the US Federal Reserve might not cut interest rates further.
Oil prices recovered after dropping the previous day. The impact of OPEC+ production cuts and a potential Iran deal remained a concern, as these factors could lead to additional Iranian oil supplies and an oversupply in the market. The gold price lost all its previous day's gains.
For more on today's market action, see here.
Enrichment Insights:
- Trade Reductions: Trump's tariffs are expected to reduce U.S. imports by about $542 billion in 2025, a decrease of 16%. This reduction reflects the economic effects of the tariffs and potential foreign retaliation[4].
- Revenue and GDP Impact: The tariffs are projected to raise $2.1 trillion in revenue over the next decade but will reduce U.S. GDP by 0.7%. The tariffs will also lead to a reduction in market income by 1.2% in 2026[4].
- Retaliation and Trade Relationships: The tariffs have led to retaliatory measures from countries like China, Canada, and the European Union, affecting $330 billion of U.S. exports. This retaliation will further reduce U.S. GDP and revenue[4].
- Inflation Fears: Despite the minimal impact of tariffs on inflation so far, economists still predict a potential rise in inflation in the coming months as retailers restock with tariff-affected goods. However, recent tariff reductions might mitigate these pressures[2].
The community and employment policies of various businesses may be affected by the inflating economy due to the ongoing trade conflicts and tariffs, as investors continue to weigh the risks against the potential benefits from improved trade relations. Moreover, finance institutions and businesses considering investing in the stock market should closely monitor the inflationary pressure that stemmed from the tariffs, as this could impact the return on their investments.
