Another round of negative headlines overnight is weighing on global risk markets today and driving Treasury yields lower, with the 5-year yield below 2% for the first time since 2017. Major equity indices are in the red, including a 1.1% decline in S&P 500 futures. One of the main issues effecting markets today was President Trump’s surprise decision last night to unveil a new tariff policy against Mexico in an effort to force our southern neighbor to curb immigration flows across the border. This caught everyone by surprise, with some analysts opining that a weaker Mexican economy due to tariffs will only increase the number of citizens trying to cross the border to find work. China said it is working on an “unreliable entities” list that would target foreign firms it feels hurt the country’s interests, which is a response to the U.S. actions against Huawei but not necessarily something China hasn’t already done in the past. China also released disappointing manufacturing data relative to expectations (and in contraction territory). 

Personal income and spending were both better than expected in April, rising 0.5% and 0.3%, respectively. The PCE deflator (headline inflation) rose 0.3% m/m, and core PCE was up 0.2% in April, both figures in line with expectations. On a year-over-year basis, headline PCE was just below expectations at 1.5% (prior month revised down to 1.4%), and core PCE was in line with expectations at 1.6% (prior month also revised lower to 1.5%). Inflation has been the most watched economic metric in recent months as it relates to market speculation on the next Fed action, but at this point, the trade headlines are drowning everything else out. The current reading on core PCE is certainly below the Fed’s target, but Powell and other Fed governors have been largely dismissive of the recent inflation softness because they believe it has been driven more by transitory factors. The market will be listening closely to upcoming Fedspeak to gauge how leaders perceive the economic risks of the recent escalation in trade tensions

Jason Haley
Managing Director, Investment Management Group