Wall Street Riding on Trade Hopes Amid Rising Inflation Woes
Stock Market Optimism Rises due to Anticipated Tax Reduction
As trade tensions ease, Wall Street revels in a positive trading session to close the week, yet economic indicators hint that President Trump's trade policies are relentlessly pushing inflation.
The US stock markets exhibited an optimistic vibe on the final trading day, with easing tensions in the US-China trade dispute underpinning market prices. However, disappointing economic data navigated a temporary speed bump. The Dow Jones Index closed 0.8% higher at 42,655 points, while the S&P-500 and the Nasdaq Composite advanced by 0.7 and 0.5% respectively. A total of 1,916 (Thursday: 1,809) advancers and 831 (959) decliners were recorded on the NYSE, with 61 (56) remaining unchanged. Bond yields provided some support, with the yield on 10-year papers falling by 2 basis points to 4.44%.
Economy
Trade tensions remain at the heart of the market. Sources disclose plans for the US government to discuss agricultural tariffs and other trade barriers with the European Union during trade talks. Additionally, the US is rumored to address economic security and digitalization.
While trade issues persist, some investors express cautious optimism. Alexandra Wilson-Elizondo of Goldman Sachs believes that a strong first-quarter earnings season and the easing of tensions in the US-China trade dispute have boosted investor confidence. However, she warns that budget, taxes, and deregulation will take the center stage if one chooses to overlook the trade dispute for the next 90 days. Despite the risks, investors seem to have left most of the bad news behind.
Politics
The recurring inflationary pressure has become apparent with US import prices surging more than anticipated in April, leaving a trail of tariffs, particularly the ones against China. Imports increased by 0.1% from the previous month, defying predictions of a 0.4% decline due to the dampening effect of lower oil prices. Without the decline in oil prices, imports would have risen by 0.4% from the previous month, demonstrating strong inflationary pressure due to the tariffs.
Elsewhere, housing starts declined less than expected in April, and the University of Michigan's consumer sentiment index took an unexpected plunge. These outcomes, coupled with higher US import prices, signal a second consecutive day of bad news regarding the inflationary impact of Trump's tariffs. This usually results in hesitancy to purchase or forward buying, rather than long-term purchase intentions.
Economy and Business
Among individual stocks, Boeing lost 0.2% despite Etihad Airways ordering 28 wide-body aircraft from the U.S. maker. The order consisted of a mix of Boeing 787 and 777X with GE engines, along with a service package. Despite the new aircraft not expected to enter service until the end of the decade, observers have criticized Boeing for a slow recovery in production numbers, which were affected by the crash of two 737 MAX aircraft in 2019, the onset of the Covid pandemic, and the incident in early 2024 when an Alaska Airlines Boeing plane lost an emergency exit door.
Meanwhile, two of the largest cable and broadband providers in the U.S. are merging. Charter Communications is acquiring Cox Communications for $21.9 billion. In the deal, Cox is valued at $34.5 billion, including debt. Charter Communications' stock gained 1.8%. Applied Materials (-5.3%) surpassed expectations in the second quarter but disappointed with its revenue outlook. The numbers from video game developer Take-Two Interactive (-2.4%) for the fourth quarter were mixed, with the company's guidance for the current fiscal year below market expectations.
Currency and Commodities
The dollar recovered slightly, with the Dollar Index gaining 0.2%. Higher import prices and inflation expectations weighed against further rate cuts by the US Federal Reserve. Oil prices regained slightly after their previous falls. Concerns about OPEC+ production cuts and potential Iran deal negotiations continued to exert pressure, as a deal could enable additional Iranian supplies at a time when the market was already forecasting an oversupply. The gold price eroded all its previous day's gains.
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Tariffs and Trade Policies: A Catalyst for Inflation and Market Volatility
President Trump's 2025 trade policies involve a complex interplay of tariff increases, strategic pauses, and new agreements. These policies tend to raise inflation by increasing costs of imported goods and inputs due to higher tariffs. Additionally, they present challenges to the stock market by increasing uncertainty and cost pressures, potentially dampening stock market performance. Recent trade agreements may, however, improve investor sentiment and market stability. The broad increase in tariffs over 1941 levels could have mixed effects sector-by-sector, with some U.S. manufacturers protected from foreign competition while others exposed to higher input costs or retaliatory tariffs are penalized.
Community policies, such as employment and finance, within the business sector might be affected by President Trump's trade policies, given their impact on inflation. Increased tariffs, a key aspect of these policies, contribute to higher costs of imported goods and inputs, which can lead to inflation. Consequently, employment policies may need to address any Labor market implications arising from inflationary pressures. Meanwhile, finance policies could potentially ease the impact of inflation on businesses and households through strategic monetary interventions.
