The current geopolitical climate has injected an extra dose of unpredictability for economic participants, as investment and consumption decisions for everyone have been clouded by trade wars and fiscal policy. Sentiment on the economy is understandably depressed, weighed down by uncertainty; however, real economic data remains expansionary, and should be able to withstand geopolitical stress and tariff concerns over the next few months.
Labor market data last week was solid, with payrolls growing by 177,000 jobs in April, handily beating expectations. The unemployment rate remained near a healthy 4.2% rate, and while it is too early for tariff uncertainty affect employment, it is clear that the economy is on sound footing.
Consumer sentiment on the outlook for jobs, however, is a different story. The most recent Conference Board Consumer Confidence Survey results indicated that 32% of respondents expect there to be fewer jobs in 6 months, which is the highest reading since the Great Financial Crisis.
Dynamics around inflation are similar, as the recent core PCE (personal consumption expenditures, excluding food and energy) release continued to show a moderating pace of inflation, with core PCE up 2.6% on an annualized basis.
Consumer sentiment, however, reflects a deep concern for the future path of inflation. Survey measures of expected inflation have ticked higher in recent months.
It is evident that uncertainty is weighing on sentiment, but the effects on underlying economic activity have yet to be seen. This is natural, as the impact of tariffs, whatever they end up being, will take months to materialize in the hard economic data readings.
How does this affect markets and, in particular, interest rates? We believe the FOMC will continue to display patience in resuming rate cuts until the second half of this year, if inflation and growth continue to decelerate. The variance of outcomes for the economy will be wide, as tariffs, tax cuts, and fiscal deficit developments will all serve as catalysts for the economy and markets through the summertime.
Originally published by Sage Advisory
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