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ON DECK FOR WEDNESDAY, JUNE 11

ON DECK FOR WEDNESDAY, JUNE 11

KEY POINTS:

  • Global markets unimpressed by trade headlines, await US CPI
  • A US-China deal would merely restore the May 12th 90-day fiancé arrangement…
  • …that fell apart after both sides immediately cheated on each other…
  • …assuming Trump, Xi Jinping agree to it…
  • …and now leaves big questions in place around the mid-August expiration
  • Slow moving US courts will keep IEEPA tariffs in place potentially into at least Fall
  • The Fed will likely look through US CPI…
  • …as data quality, underlying drivers, and tariff uncertainties mess up the reading…
  • …and with the focus still on future months of rolling cost and price pressures

Global markets are largely shaking off trade developments ahead of US CPI. US equity futures are slightly in the red, European cash markets are mixed but on balance slightly in the green, and Chinese equity benchmarks were mostly up by ½% to ¾% overnight. Sovereign bond curves are higher and steeper across the US and Europe with long-ends getting hit by 2–7bps across most major benchmarks.

The trade news is that the best the US and China could potentially agree upon yesterday (pending their leaders’ support) was to return to the conditions in the May 12th 90-day fiancé trial period that fell apart as both sides cheated on each other. Plus, IEEPA tariffs are going nowhere fast.

IEEPA TARIFFS IN PLACE THROUGH SUMMER

The US Appeals Court said last evening that IEEPA tariffs that were struck down but temporarily reinstated on appeal can stay in place until July 31st when the Court will hear arguments in the appeal. That takes us until at least August, maybe longer, before we get a ruling on whether IEEPA tariffs are legal. Should the US administration lose again, then a further delay would likely transpire given the probability that the administration would appeal to the Supreme Court. All of which is to say that the IEEPA tariffs are likely here throughout the summer.

MARKETS LARGELY IGNORE US-CHINA ‘AGREEMENT’

The US and Chinese delegations reportedly agreed last night on a framework that requires the US and Chinese leaders to ratify it, so watch for the reactions by both leaders. It’s a weak step. Markets are right to have barely reacted, despite Commerce Secretary Lutnick’s slick salesmanship.

This new agreement is the May 12th agreement all over again that deescalated tensions for a temporary 90-day period ending around mid-August and that quickly fell apart on allegations of cheating and renewed escalation of trade tensions, including when the US imposed student visa bans and chip restrictions and China escalated rare earth export restrictions.

The joint statement on that agreement in May is here. This is a very good summary of what the Geneva agreement initially included. That agreement had resulted in the following:

  • The US agreed to suspend the 34% reciprocal tariff from the April 2nd ‘Liberation Day’ announcement for 90 days until about August 12th. It agreed to remove the retaliatory reciprocal tariff rate imposed on April 8th and 9th that had raised that tariff to 125% from 34%. It reimposed the 10% baseline tariff on imports from China, Hong Kong and Macau for 90 days. All other tariffs remained in place and were unaffected by the Geneva agreement including the 20% fentanyl tariffs, the Section 301 tariffs imposed since 2018, the 25% section 232 tariffs on autos, aluminum and steel, and other measures. The US also retained the end of the de minimis duty exemptions for Chinese imports.
  • China, in turn, had agreed on May 12th that it would cut retaliatory tariffs from 34% to 10% for about 90 days until around August 12th and cut the retaliatory tariffs announced on April 9th and April 11th that went from 34% to 125%. China’s previous 10–15% tariffs on some US goods that were imposed in February and March remained in place and so were the retaliatory tariffs China announced in 2019 in response to US tariffs.

So, should Trump and Xi Jinping agree on what both of their delegations agreed to yesterday—a big remaining ‘if’—then we need to see the details to make sure they’ve unwound everything back to the May 12th stances. At best, that would put us back in limbo with respect to what may transpire when the truce expires once again around mid–August, assuming both sides don’t start escalating once more. None of the core issues between the countries have been addressed. The path forward remains highly uncertain.

WHY THE FED WILL FADE US CPI

US CPI for May arrives at 8:30amET. 0.2% m/m SA and 0.3% m/m SA for headline and core are expected. I’ve padded underlying arguments for a slight tariff effect that may or may not transpire.

This is going to be a potentially messy one. First is the issue of data quality given the BLS’s admissions on how cutbacks are resulting in a much higher share of the basket being roughly estimated by prices for comparable products or prices in other regions of the country in lieu of harder data (chart 1). Trust in US inflation figures has been compromised which is unfortunate for markets and the Fed's confidence in how to read developments. More uncertainty, more patience.

Chart 1: BLS Use of Alternate Estimation Methodology in US CPI

Second are the underlying traditional drivers that are reviewed in my weekly for your consideration. It goes over drivers like shelter, autos, core services, gas, food etc.

Third is the question of tariffs. It may or may not be too soon to expect signs of pass through given the suddenness of the escalation in April and May and given mitigating factors like lags associated with inventories, supply chain effects such as contract lags, and profit margins. Watch core goods aka commodities less food and energy and its breakdown for such signs of direct tariff effects. Indirect effects may materialized elsewhere in several services components.

Charts 2 and 3 show soft data indications from ISM and NFIB surveys that indicate rising price pressures lie ahead with highly correlated lags.

Chart 2: ISM Prices Paid vs Inflation; Chart 3: NFIB Prices Index vs Headline CPI

Does today’s CPI update matter to the Fed? Not in my opinion. Read the memo. They want gobs of data on the dual mandate pressures and clearer signs of where the convoluted mess of other policies being pursued by the US administration wind up before they figure out what may be the appropriate course of action. It’s far too soon to see cumulative effects of tariff actions on price pressures and supply chains. So far the inflation data we’ve see over recent months is ancient news to the FOMC in the face of forward looking risks and uncertainties aplenty. In my weekly, I argued that staggered tariff deadlines and rolling efforts to front-run them would likely drive waves of cost and price pressures, compounding uncertainty over how to read the trends. In the meantime, the forecast lengthy hold by the Federal Reserve continues to perform well.

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