By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Trade and inflation remained in focus last week with signs of progress appearing on both fronts. Wednesday’s Consumer Price Index (CPI) report showed that inflation continues to work its way closer to the U.S. Federal Reserve’s (Fed’s) 2.0% target. Later that day, the United States and China announced that they had reached a framework trade agreement with final approval pending. Despite the good news, domestic markets weren’t able to finish the week in positive territory after rallying sharply off tariff-induced lows over the last two months. The S&P 500 (SPX) fell roughly 0.4% once the volatile trading week had concluded, while the Dow Jones Industrial Average (DJIA) and Nasdaq Composite (COMP) fell 1.3% and 0.6%, respectively. International markets continued to outperform domestic markets last week, with the MSCI EAFE and MSCI Emerging Markets indices returning -0.2% and 0.8%. International economies have faced less economic uncertainty and have been supported by the prospect of fiscal stimulus so far in 2025. Bond markets also saw gains last week as investors shifted portfolios toward less-risky assets amid rising geopolitical tensions.
Markets began the week on a subdued note on Monday, closing mixed as investors reacted cautiously to renewed trade negotiations between the United States and China. The major indices closed mixed with the SPX and COMP gaining slightly, while DJIA dipped. Trade talks resumed in London, where U.S. Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer met with Chinese Vice Premier He Lifeng. The discussions focused on the United States potentially easing semiconductor technology restrictions in exchange for renewed exports of Chinese rare-earth minerals.
Stocks rose on Tuesday as investors remained focused on the progression of trade talks. Reports suggested that talks had been more productive than anticipated, sending the technology-focused COMP up 0.6%. In economic news, the National Federation of Independent Business (NFIB) small business index moved higher in May after declining in four straight months, signaling an improvement in business sentiment amid easing trade tensions.
Wednesday was the highlight of the week for economic data and trade developments. The day began with a better-than-expected reading of the CPI. The inflation measure rose just 0.1% for the month of May and 2.4% over the last year, both below consensus expectations. Core CPI, which removes the impact of volatile food and energy costs, also came in softer than expected, rising just 0.1% for the month and 2.8% on an annual basis. Core services inflation, which focuses on price changes of services such as healthcare, transportation, entertainment and education, rose 3.6% from a year earlier, and matched the prior month’s reading for the lowest level since November 2021. The details of the report showed that tariffs haven’t been passed on to consumers in a meaningful way so far. Inflation data continues to move in the right direction, but economists are wary that tariffs could put upward pressure on prices in the months ahead, or at the very least weigh on discretionary spending.
Later in the day, Commerce Secretary Lutnick announced that the United States and China had reached a framework trade agreement, pending approval by President Trump and Chinese President Xi Jinping. Details of the agreement are still vague, but reports suggested that the United States will lift some export controls on technology, especially semiconductors, in exchange for access to China’s rare-earth minerals. According to a statement from Trump, the tariff rate for China will be 55%, consisting of the existing 25% duties and the additional 30% imposed earlier this year. At the same time, China will impose a 10% tariff on American goods. The framework agreement comes well ahead of the mid-August deadline that was created following a 90-day pause in tariff implementation on May 12. While the announcement was encouraging, investors will likely proceed with caution until a full agreement is officially signed by both sides.
Stocks closed higher on Thursday as investors weighed the outcome of trade negotiations, labor market data, and a reading of the Producer Price Index (PPI). Weekly jobless claims came in slightly above estimates but remained stable relative to historical standards. Continuing claims rose to 1.96 million, the highest reading since November 2021. The labor market remains healthy but is showing signs of cooling despite a steady unemployment rate of 4.2%. PPI, which measures the change in the price of goods sold by manufacturers, is a leading indicator of CPI because producers may pass on rising costs to consumers through higher prices. Recent increases in tariffs have led to a sharpened focus on PPI as economists expect higher import costs to be passed on to consumers. May’s PPI came in below estimates and showed an increase of 2.6% from a year ago, which was also slightly higher than the 2.5% increase in April. Core PPI, which like Core CPI removes food and energy costs, rose 3.0%, better than the 3.2% change the month before. These figures indicate that while inflation is cooling, more progress needs to be made before the Fed should feel comfortable lowering interest rates in a meaningful way, especially while the labor market remains resilient.
Rising geopolitical tensions between Israel and Iran rattled markets on Friday, sending global equity markets lower and bonds higher. Reports indicated that Israel targeted Iranian nuclear development sites and military installations in an overnight missile attack. Iran responded with drone and missile strikes, leading to concerns that the conflict could escalate further. Heightened geopolitical risk had investors seeking safe-haven assets and speculating on energy prices. Gold rose 1.5%, while crude oil prices spiked more than 10% on concerns that a spreading conflict could disrupt the global energy supply. Oil saw its largest weekly gain since 2022. Elsewhere, the University of Michigan’s Consumer Sentiment survey for June came in at 60.5, up significantly from 52.2 in May, reflecting recent easing of trade and inflation pressures.
Despite some setbacks last week, stocks have rallied 20% from their April lows and are hovering around all-time highs, reflecting investors’ expectation that trade tensions will continue to ease and clear the path for solid growth in the coming quarters. In the coming months we expect markets to experience elevated volatility, mostly driven by trade and geopolitical risks, before trending higher into the end of the year as focus shifts to monetary policy and the potential for stronger post-trade-war growth.
Looking forward to this week, the Fed will be in focus on Wednesday as it is expected to keep policy rates unchanged until its September policy meeting. U.S. markets will be closed on Thursday in observance of the Juneteenth holiday.
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TIME (ET) |
REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
|
MONDAY, JUNE 16 |
||||
|
8:30 am |
Empire State Manufacturing Survey |
June |
-6.0 |
-9.2 |
|
TUESDAY, JUNE 17 |
||||
|
8:30 am |
U.S. Retail Sales |
May |
-0.6% |
0.1% |
|
8:30 am |
Import Price Index |
May |
-0.2% |
0.1% |
|
9:15 am |
Industrial Production |
May |
-0.1% |
0.0% |
|
9:15 am |
Capacity Utilization |
May |
77.7% |
77.7% |
|
10:00 am |
Home Builder Confidence Index |
June |
36 |
34 |
|
WED., JUNE 18 |
||||
|
8:30 am |
Housing Starts |
May |
1.37M |
1.36M |
|
8:30 am |
Building Permits |
May |
1.44M |
1.41M |
|
8:30 am |
Initial Jobless Claims |
June 14 |
250,000 |
248,000 |
|
2:00 pm |
FOMC Interest Rate Decision |
|||
|
2:30 pm |
Fed Chair Jerome Powell Press Conference |
|||
|
THURSDAY, JUNE 19 |
||||
|
Juneteenth Holiday, Markets Closed |
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|
FRIDAY, JUNE 20 |
||||
|
8:30 am |
Philadelphia Fed Manufacturing Survey |
June |
-1.0% |
-4.0% |
|
10:00 am |
U.S. Leading Economic Indicators |
May |
-0.1% |
-1.0% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market