Consumer Sentiment Approaches Record Lows

Tariff deal optimism, inflation expectations drive a rise in rates. Treasury yields climbed 3-6 bps across a steepening curve today, with 2-year and 10-year yields now at 4.00% and 4.48%, respectively. The move was initially fueled by multi-decade high inflation expectations data, which overshadowed a continued decline in consumer sentiment. Meanwhile, reports that the U.S. and the E.U. have begun tariff negotiations spurred a risk-on move that further contributed to rising yields. Equities continued to climb, with the S&P 500 and NASDAQ up 0.70% and 0.52%, respectively, extending multi-month highs.

Consumer sentiment falls again while inflation expectations surge. Recent warnings from Chair Powell and other Fed officials about stagflation (subdued economic growth and high inflation) risks were supported by today’s economic data. Tariffs have soured consumer sentiment over the past several months, and May’s preliminary figure was 50.8, the second lowest level on record and below the 53.4 estimate. Meanwhile, 1-year University of Michigan inflation expectations soared from 6.5% in April to 7.3% in May, the highest level since 1981. Markets are hopeful that recent trade deals will limit potential for subdued consumer spending and long-term price pressures, though uncertainty remains.

President says U.S. will set country-specific tariff rates soon. Today, President Trump said that tariff rates on U.S. trading partners will be set on a country-specific basis over the next few weeks, due to a lack of capacity to negotiate trade deals with all partners over a limited timeframe. The President said the tariff rates will be set “over the next two to three weeks,” and added that he thinks “…we’re going to be very fair. But it’s not possible to meet the number of people that want to see us…” The President said “150 countries want to make a deal,” however he didn’t offer specifics on which countries would receive letters notifying them of the tariffs. Trade talks continue to progress with various partners including Japan, South Korea, India, the E.U and, most recently, Cambodia.