The US data gap widens

Risk assets began last week on strong footing as news of US-China trade negotiations was received positively. The S&P 500 exceeded its pre-Liberation Day levels and turned positive for the year, while the risk premium in corporate bonds continued its descent from recent highs. 

Despite the market optimism, consumer sentiment remains gloomy. The latest University of Michigan consumer sentiment survey deteriorated further in the month of May to the second-lowest reading in history, behind only June 2022. Consumers soured on current economic conditions and future expectations. Additionally, the survey pointed to higher and stickier inflation as the one-year forward inflation expectation increased to 7.3%, from 6.5% in the prior month, and the longer-run expectation increased to 4.6%, from 4.4%.

While the consumer remains braced for higher inflation, it’s not yet showing in the hard data. The April Consumer Price Index increased 0.2% month-over-month, and the year-over-year rate fell to 2.3% from 2.4%. Underlying core inflation held steady, though, at 2.8% year-over-year, still the lowest level since April 2021. In addition to declines in airfare and used vehicles prices, apparel inflation was also negative last month. However, these were offset by firmer shelter, car insurance and medical care prices. As the gap between the hard and soft data continues to widen, the outlook for the US economy—and the Federal Reserve’s next move—only becomes murkier. With current inflation readings above its 2% target, and expectations for a lagging tariff impact, the Federal Reserve is likely resolved in its recent decision to hold interest rates here and remain in a “wait-and-see” mode.