Week ended May 16, 2025: What caught my eye this week

President Trump has been in the Middle East this week with a contingent of US business leaders and his finance / economics team, cutting business deals left and right with Gulf countries that are expected to benefit US companies.  If you are able to ignore the hyperbole that rolls out of the president’s mouth regarding size (and at times even the existence) of such deals, I think these sorts of meetings are net-net good for American companies.  This sort of bravado suits Mr Trump well, and is something that he is clearly good at.  The political theatre of it all is also entertaining, and it’s hard to fault Mr Trump’s energy, especially when contrasted to the waning months of “Sleepy Joe’s” presidency.

As far as what else mattered this week, let’s start with inflation.  US CPI in April came in slightly better than expected, with headline / core CPI at 2.3% / 2.8% YoY.  As you can read in the BLS CPI report for April, headline YoY CPI at 2.3% was the lowest since February 2021, and slightly below the consensus expectation of 2.4%.  US stocks rallied on the news, but bond investors were more cautious and reserved, fearing that even the dialled-back tariffs might push inflation higher in the coming months.  The (slightly) better-than-expected inflation data for April certainly hasn’t changed investors’ view of the Fed’s likely moves for the remainder of this year, with the CME FedWatch Tool projecting only two 25bps reductions in the Fed Funds rate: one at the FOMC meeting in September, and one at the FOMC meeting in December.  As only President Trump can do, he took the opportunity to go after Fed Chairman Powell again after the inflation report was released, writing on social media:

“No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!!” ….“THE FED must lower the RATE, like Europe and China have done. What is wrong with Too Late Powell?”

The CPI report in any event was a sideshow to the agreement last weekend between China and the USA to roll back tariffs to levels that are still painful, but not de facto embargo-level, while a more comprehensive agreement between the world’s two largest economies is negotiated.  As he has done in the past, Mr Trump tipped off risk investors by encouraging them to buy US stocks ahead of the meetings in Geneva, turning out (for the second time) to be sound advice.  You will have to decide for yourselves the ethics of these sorts of comments coming from the leader of the free world.  In any event, we have managed to now claw back all of the lost ground YtD in the S&P 500 (Tuesday’s close), suggesting to me two important things:

• “Buying the dip” still seems to work, although the value of all of this trade deficit mumbo jumbo and strange “liberation day” tariffs is well beyond my comprehension, since the US seems to have lost more than it has gained, and

• The “Trump put” is strong, with the president willing to yield on his economic “plans” (if you can call it that) that rattle investors, somehow spinning these un-necessary events as a “win” for his administration.

As I have emphasised several times recently, it is the bond market that is really the adult in the room.  I put together a table that illustrates the key days since the end of the 3rd quarter 2024 that have driven movements in the S&P 500.  I have also included the yield on the benchmark 10y US Treasury on the same days, to give you a sense of how bond investors felt during each event. 

The fact is that stocks are heavily influenced by innuendo, retail buyers/momentum investors, and social media posts, any or all of which can cause a stock – or the market more broadly – to become untethered from its intrinsic value.  Fundamentals often get shoved aside, and valuations become exaggerated as momentum investors drive stocks up (and occasionally, although rarely, down).  Bond investors are much more professional and less subject to whims based on the latest social media post or things that Mr Trump might say.  Hence, I consider the messages resonating from the bond market to be a much better reflection of the direction of travel of the US and global economies.  The economic messages I get from looking at the table above re threefold:

• Upon his election, expectations were that Mr Trump would pursue pro-growth strategies that could both worsen the US debt situation and prove inflationary – bond yields rose suddenly and sharply

• The fear of a trade war, culminating in the infamous “liberation day” tariff announcement by Mr Trump, caused bond investors to fear a recession, superseding the potential inflationary effects of the tariffs and pushing long-term yields lower even as stagflation remained a plausible scenario, and

• The capitulation by the Trump Administration, followed by the important framework agreement between the US and China (90 day reprieve), caused fear of an economic slowdown to subside for the time being, pushing yields higher again.  Even with April’s CPI report, the fear of higher inflation caused by tariffs also very much remains on the table. 

The last thing I will mention this monring is that many of the Trump Administration’s economic proclamations / policies have secondary effects that seem lost on the administration, but not on investors.  The price of oil is one (“drill, baby, drill”), but two others came up this week.

• Drug prices – Mr Trump signed an executive order earlier this week regarding capping drug prices, which he said would reduce the cost of medicines for Americans by 30% to 80%.  However, shortly after it was announced, most US pharmaceutical company stocks regained their post-executive order losses because the order was vague and deemed to have little teeth.  The US does indeed have a problem with high drug prices, with a study in 2021 by the GAO noting that the costs of drugs in the US are two to four times higher than the same drugs in Canada, Australia and France.  However, the US has a broader issue with significantly higher medical costs across the board than other developed countries, not just with drugs.  If the administration caps drug prices, it directly affects the economics of pharma companies by reducing their margins, and this in turn might reduce the investment in R&D that underlies the development, testing and production of new drugs.  The fact is that the cost structure of drugs (and healthcare more broadly) is complicated in the States.  High drug prices are not simply caused by pharmaceutical companies “gouging” customers as Mr Trump likes to frame it.  I think this BBC article is worth reading if you want to learn more.

• iPhone production – This is the issue that most interests me because it highlights the importance of comparative advantage by countries in free trade, even as Mr Trump tries to re-onshore production that will sharply raise prices for Americans in a broad array of products.  Even before Mr Trump took office, Apple was in the process of reducing its reliance on manufacturing of the iPhone in China by moving production to India.  The (hopefully) temporary “embargo-level” tariffs between the US and China that have been deferred for now was a sign that Apple was making the right decision, still taking advantage of dramatically lower labour costs in Asia but diversifying away from China.  Although President Trump claims to have CEO Tim Cook’s ear, the reality is that Apple can either continue to take advantage of lower labour costs in Asia (by producing in India and China), or it can produce the iPhones in the USA at significantly higher costs which will be partially or fully passed onto consumers.  This “real-life” example is exactly why blanket tariffs are value destroying for both the US and its trading partners, a fact that Mr Trump is perhaps beginning to slowly grasp.

MARKETS LAST WEEK

It is finally feeling like (as my children say) I can “chillax” as stocks, corporate bonds and other risk assets rediscover their footings.  Stocks in particular are heading back to the stratosphere as if “liberation day” never happened, which is amazing in that the lingering damage of the so-called trade war cannot simply be undone.  Consumer confidence is heading in the wrong direction, and companies are withholding guidance because they are unsure of how the tariffs (even dialled down) will affect their businesses going forward.  In spite of economic concerns, the Trump Administration has capitulated so quickly and severely it has once again stoked animal spirits, as investors rush to strap on risk as quickly as possible, pushing stocks back to the stratosphere with scant concerns about the impact of the trade war on global economic growth or future corporate earnings.  I could go on and on, but for now, I just want to bask in the moment since US stocks have now completely recovered their YtD losses.  

Last week was good for nearly anything risk related.  Stocks were better globally, led by US stocks.  The recovery was broad in US equities, led by technology shares, but large caps and small caps alike also participated.  Corporate bonds were also better bid, with credit spreads coming in sharply even though US Treasury yields increased across the curve.  Proving once again it is a risk asset (not a so-called “store of value”), BTC held on to its gains, back over $100,000 now.  The casualty of course has been haven assets, most notably gold, which has been weak now for the last few weeks since the Trump Administration started to throw in the towel on blanket tariffs.  Oil was slightly stronger on the week, in line with improved expectations for global economic growth.  Even the US Dollar has rediscovered its mojo as investors move back into dollar assets to capitalise on a return to US exceptionalism.

As far as US Treasuries, Moody’s downgraded the US on Friday. The US now has lost all of its AAA ratings (from S&P, Fitch and now Moody’s), a clear signal that highlights the worsening fiscal position of the US.  I suppose the downgrade could prove “timely” in that the House is trying to cobble together a 2025-26 budget, which regardless of the “blah blah blah” coming from House members, will almost certainly increase the deficit and worsen the US debt situation.  Let’s be real – you can’t deliver all of the tax cuts Mr Trump has promised, extend the 2018 tax cuts, and increase defence spending, without VERY large reductions in government expenditures, certainly much more severe than have been put on the table.   Keep in mind, too, that reducing the deficit is a de facto form of fiscal tightening, which will have a negative effect on US economic growth.  It’s a dilemma, one that we will see play out in the coming weeks.  The trade deficit has been the focus of this administration, but the rubber meets the road with a to-be-decided 2025-26 US budget.  US Treasuries remain the largest, most liquid government bond market in the world, but I suspect US yields will remain under pressure because of the on-going budget discussions that are suggesting worsening US debt, less concerns about future economic growth as tariffs are dialled down, and tariff-related effects on prices that are stoking future inflationary expectations. 

The table(s) below have been updated for the close on Friday.

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