With the FOMC meeting fresh in everyone’s mind, traders are going to be paying very close attention to US CPI figures coming out on Tuesday. The argument from economists and the Fed itself is that tariffs will likely cause higher consumer prices. And April’s data could be the first test of that theory.
On the other hand, following the deal between the US and China to dial back recent tariff hikes, the market could still be on a sugar high through the data release. Depending on what happens, the inflation numbers might be a bring back to Earth moment for the markets, or fuel further gains.
A Good Start
Markets cheered the China news from over the weekend, in which both countries agreed to dial back the tit-for-tat tariffs that had been pushed into triple digits last month. But, tariffs would remain, with 30% on Chinese goods and 10% on US goods. Additionally, sector-specific tariffs, like on steel and automobiles, remain in place. Markets understood the move as a “deescalation”, but US Treasury Secretary Scott Bessent made it clear that 10% was the “floor” for tariffs. That implies tariffs in some form would likely persist.
Signs of underlying trouble were apparent early Monday, yields in short term debt rose while long term bonds saw lower yields. The rate-sensitive 2-year yield climbed in early trading, a sign that the market doesn’t really believe the current deal will substantially bring down inflation or move the Fed towards easing. There is still a lot more negotiation to do, meaning some uncertainty will persist. And it’s not immediately clear if the deal will help restart trade across the Pacific and fill ships that had been seeing as much as a 60% drop in demand to ship between the US and China.
The Fed Is Still in Play
Last weeks’ FOMC meeting also came with a dose of caution, with the statement highlighting the risk of a slowing economy while inflation remained high. This was interpreted as the Fed warning of a stagflation scenario, with the central bank likely prioritizing price stability. Which implies higher prices.
The Fed was adamant about the upward risk of inflation from tariffs, which convinced many in the market that it will be at least two more months before we see a rate cut. Since tariffs were applied at the start of April, then the upcoming CPI data could provide some insight to see just how much of the tariff costs are actually being passed on to the consumer. This could help adjust the math a little bit about how worried the Fed should be about tariff-induced inflation.
What to Look Out For
US April CPI change is expected to accelerate to 2.5% from 2.4% prior, despite reported lower gasoline prices through the course of the month. This implies that inflation is expected in other products, such as those that are imported. Core inflation, which strips out energy and food, is expected to remain stable at 2.8%, but well above the 2.0% target for the Fed.
It’s worth pointing out that last time, analysts had predicted a rise in CPI due to tariffs. But in reality, inflation actually fell. This could be attributed to lower consumer confidence which means a drop in demand for discretionary items.