By Benjamin Picton, Senior Market Strategist At Rabobank
Animal Spirits
The NASDAQ and S&P500 pumped higher yesterday as trade war détente and a lower-than-expected US CPI print fuelled optimism. The S&P500 is now in the black year-to-date and the NASDAQ is in bull market territory, despite the index remaining south of where it was on January 1st. Crude oil extended gains for a fourth-straight session, rising 2.57%, and yields on 10-year Treasuries finished mostly unchanged after trading in a 6bp range.
US April CPI came in at 0.2% M-o-M for both the headline and core measurements. This takes year-on-year CPI down to 2.3%, versus an expected reading of 2.4%. Core services (shelter, principally) was the main driver of price rises, followed by energy as a ~$10/bbl fall in crude over the course of the month was more than offset by rising electricity and natural gas prices. Core goods barely registered and food prices declined. Egg prices fell by 12.7%, the largest monthly fall since 1984, which will no doubt please a President who has elevated the price of eggs as an indicator of economic policy competence.
Egg prices down 12.7%, biggest drop since March 1984, second biggest drop on record pic.twitter.com/AWcuDPb8qh
— zerohedge (@zerohedge) May 13, 2025
Digging through the entrails, there were some hints of potential tariff impacts on prices. Audio equipment experienced its largest-ever monthly rise (8.8%) and price rises for home furnishings were up 1% after remaining flat in March. On the flip side, apparel prices actually fell during the month despite sharp falls in the Dollar spot index over the course of both March and April. Taken together with tariffs, a weaker Dollar would usually be suggestive of higher prices for imported goods.
It’s hard to separate the signal from the noise here because there are a lot of uncertainties at play. Consumer prices for products sold in April likely relate to stock that was brought into the country during the import surge before Liberation Day. This means that the cost basis of many of these products will not include the April tariff impact. Additionally, the influence of a weaker US Dollar over the course of March and April may be mitigated to some degree by importers forward-hedging foreign exchange exposures. There is also the possibility of both exporters and importers “eating” some of the impact of the tariffs through lower export prices and lower importer margins. Trump and Bessent have both claimed that it would be the exporters who wear the brunt of tariff impacts, but this will ultimately depend on the price elasticity of demand for individual goods.
OIS futures are now pricing 53bps worth of easing in the Fed Funds rate by year end compared to 66.5bps at the end of last week. That was before the 90-day reduction in tariffs was agreed between the United States and China. The September FOMC meeting remains the first meeting that is fully-priced for a cut, but pricing has declined from -35.3bps on Friday to -25.8bps as of this morning. Clearly, while equity markets are welcoming the better than expected CPI result, the vagaries of trade policy are a more important influence on the path of the Fed Funds rate.
That brings us back to the point that economics and markets cannot be taken as an abstraction from everything else that is going on, because we actually live in a world of political economy. On that score, President Trump arrived in Riyadh yesterday and swiftly announced that Saudi Arabia will be investing $1 trillion in the United States. The real figure is disputed and might be $600 billion (as announced by the White House) or as low as $300 billion. According to a White House fact sheet the deal includes a $142 billion defence sales agreement that will see new aerospace and missile defence equipment sold to Saudi Arabia.
Trump also announced during the visit that the United States will be lifting sanctions on Syria, apparently at the urging of Saudi Crown Prince Mohammed Bin Salman and Turkish President Erdogan. Saudi Arabia and Turkey had been two of the parties backing Syrian rebels (along with Qatar, who are gifting the USA a luxury jet) against the Iran and Russia-backed Assad regime. Is the United States now encouraging development to fill a regional power vacuum in a similar vein to what it did post-WWII? Is it a coincidence that the US Treasury Department just announced sanctions on more than 20 companies it claims have been involved in shipping Iranian crude oil to China (a key backer of both Iran and Russia)?
This comes as China criticizes the terms of the recent trade agreement struck between the United Kingdom and the United States. Much has been made of the agreement’s limited impact in economic terms, but China’s Foreign Ministry seems to think that the agreement is substantive from a geopolitical perspective, and freezes China out from investment and trade opportunities in the UK.
So, the question now is: has the UK signed up for the worst trade deal in the history of trade deals? Or will other countries end up signing similar agreements that likewise seek to isolate Chinese trade and supply chain interests?
Animal spirits may be back as markets rejoice at trade détente for the time being, but all of the elements that led to trade conflict in the first place are still present.
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