May 9, 2025 Update
Headlines and Highlights
- U.S. pushes for deals in trade war: The global trade war has seen hints of progress but few specifics to date. President Trump announced the first of what he said would be several trade deals, this one with the United Kingdom. He also said he might be willing to reduce the 145% tariff on Chinese imports to 80% on the eve of U.S.-China talks in Switzerland. The preliminary UK agreement would pare back U.S. tariffs on British cars and steel while retaining a 10% base levy. Other details have been scant as the Trump administration negotiates with more than a dozen countries and pushes ahead with efforts to revamp the global trading system.
- Fed holds firm on rates, cautions about tariffs: The Federal Reserve kept its benchmark interest rate unchanged this week as expected but warned about the coming impact of tariffs. Chair Jerome Powell said that if the large increases in tariffs that have been announced are sustained, they likely will generate a rise in inflation, a slowdown in economic growth and an increase in unemployment. But he said those risks have not yet materialized. President Trump castigated Powell as a “major loser” for not cutting rates.
- Markets level off after recovery: The S&P 500 has traded more cautiously since fully recovering the substantial loss after huge tariffs were announced April 2nd and is now down 3.8% year-to-date. International stocks as measured by the iShares MSCI EAFE ETF are running about even with their U.S. peers so far in May after outperforming them for four consecutive months, and are up 13.7% in 2025. U.S. small caps have added 3% in May but remain down 8.7% this year.
Select Market Returns
Our Views
- The announcement of a limited U.S.-United Kingdom trade agreement and the scheduled opening of U.S.-China trade talks are small but welcome steps toward the de-escalation of global trade tension. However, the retention of a 10% baseline tariff in the UK deal suggests tariffs will still drag global growth lower even with agreements being negotiated.
- The U.S. economy will slow further from tariffs but it remains unclear to what extent, including whether there will be a recession. So-called soft data such as consumer confidence surveys show a downturn in sentiment and expectations. But hard economic data have yet to reflect a decline in business or consumer spending or a rise in layoffs. If there is a recession, we believe it will be mild.
- The Federal Reserve is likely to keep interest rates at 4.25% for at least one more meeting before resuming cuts in July. The longer employment stays strong and inflation remains below 3%, however, the greater the chance that the Fed delays rate cuts until the fall.
- Uncertainty about tariffs will likely hang over markets, limiting gains and increasing the likelihood of further volatility, until there are more firm trade deals. Markets have been gyrating based on hope and the president’s comments regarding trade deals rather than actual deals.
- The dollar has stabilized against other currencies after an unexpected 10% decline in President Trump’s first three months, which boosted international stocks’ value. It has risen about 2% over the past three weeks, helped by news of trade talks, however. We believe more progress on the trade war front would bolster it further.
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