This week we get U.S. inflation and retail sales updates for April. We know high frequency data like credit card billings and delinquencies tell us the consumer is seeing increased stress levels.
April was the first month when tariff revenues increased, so the inflation and retail sales reports this week should provide the first estimate of the tariff impact on inflation.
Specifically, how much of the tariff increase was passed on to consumers and whether non-tariffed prices rose above trends. Expectations are unclear for what the scale will be. We also see earnings from Walmart, which is the retailer most impacted by China tariffs, where we will be listening closely for insights.
However, with the new 90-day tariff pause, we can expect another demand surge from consumers and industrials that would want to get in front of where tariffs may end up. Make no mistake, tariffs will likely keep a stagflation risk overhanging the U.S. economy.
Animal spirits will possibly lift markets even more in response, but the real economy is unlikely to produce the economic growth needed to keep earnings growing at the rates that are priced into markets.
The broad U.S. market ETF (VTI) will test the resistance expected in the area of the 200-day average. Animal spirits could lift markets higher to be sure, but the real economy and economic growth needs to fire on all cylinders for us to make new highs this year.
Focus in the next few weeks to months may turn back to Washington and the U.S. Congress and the budget package that is being negotiated. Lower regulatory burden and pro growth (tax cut) spending will help to be sure, but the need to rein in the deficit is the biggest growth challenge in the coming years.
The markets can have high volatility on both sides up and down. The CBOE Volatility Index (VIX) needs to settle well below 20 for a better signal that all is clear.
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