Waiting for Trade Deals Is Like Waiting for Godot
Trump’s goals of creating a more level playing field in international trade and enhancing the US’ national security through the realization of sufficient industrial capacity are laudable. Unfortunately, prior administrations tolerated unfair trade practices and allowed for the diminution of the US’ industrial base to the detriment of national security. Nevertheless, some may take issue with the current administration’s strategy for correcting these glaring deficiencies.
Good inflation news and mild economic outlook send Treasury yields lower …
The equity market received a needed lift from this week's successful auctions of $39 billion of 10-year U.S. Treasury notes and $25 billion of 30-year U.S. Treasury bonds. Foreign demand was solid at both auctions. and that was welcome news a view of how foreigners currently hold 30% of outstanding US Treasury notes and bonds.
Both good inflation news and the successful auction of U.S. Treasury securities helped to lower treasury bond yields. For example, from last Friday's close of 4.51%, the 10 year Treasury yield eased to a recent 4.36%, while the 30-year Treasury bond yield fell from last Friday's 4.97% to a recent 4.84%.
Worth noting is how even a 4.3 percent 10-year Treasury yield may be too burdensome for home sales given today's richly priced U.S. housing market. All else the same, first-time home buyers may find homebuying to be unaffordable until the 10 year Treasury yield falls well under 4%.
Strong demand for Treasuries reflects expectations of modest US growth …
The strong global demand for this week's auctions of U.S. Treasury debt suggests investors believe Treasury bond yields may have already peaked. Thus, global investors do not believe that any tariff-induced price hikes will result in a lasting climb by price inflation. Rather, global investors sense the price increases resulting from tariffs will be met by consumer resistance and lower-than-expected unit sales. Unwanted inventories and the underutilization of production capacity will then drop the annual rate of core PCE price index inflation under 2%.
Both US real consumer spending and US real GDP may grow no faster than 2% annually well into 2026. Global investors and almost all forecasters are quite dismissive of any claims that US real GDP will soon attain a recurring growth rate of 3% or faster.
Full employment limits upside for noninflationary economic growth …
Suppose a quick resolution of tariff related issues sparks and upturn by US domestic spending. If the consensus view is correct and the US’ full employment rate of unemployment is 4.1%, the current jobless rate of 4.2% warns that growth of 3% or higher would probably stoke another upturn by price inflation even without help from tariffs.
Economic growth of faster than 2% amid a full employment economy would risk a return of rising price inflation and with that a higher federal funds rate and higher Treasury bond yields.
As derived from early June’s Blue Chip survey, the consensus believes the US’ unemployment rate will finish 2025 close to 4.7% and average 4.7% until 2026’s second half.
Energy prices sink despite jumps in rates for electricity and natural gas …
May’s 2.9% yearly increase by the CPI’s food price index was comprised of annual rates of price inflation of 2.2% for food consumed at home and 3.8% for food consumed away from home.
May’s -3.5% annual rate of CPI energy price deflation masked vastly different yearly changes of -11.6% for energy commodity prices and +6.8% for energy service prices. Consumer energy commodity price deflation consisted mostly of a -12.0% yearly plunge by gasoline prices. Consumer energy service price inflation was split between annual rates of inflation of 4.5% for electricity and 15.3% for piped natural gas.
Artificial intelligence (AI) will require huge amounts of electricity. The power needs of data centers will be great enough to demand substantial additions to electric power generating capacity and transmission lines. Many communities are likely to oppose new power plants and transmission facilities. The development of AI is likely to encounter numerous political obstacles.
May’s benign PPI masked tariff-related price pressures …
Aggregate measures of price inflation mask stunning outliers. May’s PPI for the final demand for food prices was up by 3.5% from a year ago. Within the latter were much faster annual advances of 125% for eggs, 10.1% for beef and veal prices, 13.0% for confectionery products and 32.5% for price of roasted coffee.
In general, the squeezing of margins by tariffs has been manageable according to May’s 4.1% annual increase by the PPI’s estimate of the final demand for trade services. The Bureau of Labor Statistics defines the “final demand for trade services” as equaling changes in the margins received by wholesalers and retailers, where margins will widen if product demand rises and/or costs decline.
May’s major yearly increases by the PPI’s index for the final demand for trade services included the 10.4% of machinery and vehicle wholesaling, the 66.2% (yes 66.2%) for computer hardware, software, and supplies retailing, the 5.6% for automobiles’ retailing, the 12.4% for auto parts and tires retailing, the 10.1% for major household appliances retailing, and the 9.2% for fuels and lubricants retailing.
Moving from margins and returning to plain, old PPI prices, May saw yearly price jumps of 8.7% for portfolio management, 6.2% for property and casualty insurance, 7.2% for legal services, 8.2% for motor vehicle repair & maintenance, and 7.2% for recreational activity instruction.
The PPI may index for cost of processed goods for intermediate demand rose by 1.9% year on year. May’s 5.2% annual increase for the costs of processed foods and feeds was led by a 6% jump in the cost of meats. Among May’s other notable yearly increases for the cost of intermediate goods were the price advances of 14.9% for commercial natural gas, 13.9% for industrial natural gas, and 6.7% for natural gas sold to electric utilities.
Tariffs drive fertilizer-related costs sharply higher …
Partly because of tariffs, May recorded elevated year-on-year cost increases of 8.5% for nitrogenates and 13.2% for phosphates, where both chemicals figure prominently in the production of fertilizers. May’s price for industrial gases advanced by 12.0% from a year ago.
Protectionist trade measures also figured in May's annual increases of 9.1% for the cost of softwood lumber and 6.0% for the cost of hardwood lumber.
Paperboard’s price jumped up by 7.3% annually in May. Moreover, May’s PPI price for paper boxes and containers was up by 6.2% annually.
Tariffs lift prices for steel, aluminum and other nonferrous metals …
Tariffs likely entered into the ample year-on-year cost increases of 8.8% for steel mill products, 17.3% for primary nonferrous metals, 10.9% for secondary nonferrous metals, and 8.8% for aluminum mill shapes.
Other notable intermediate product price increases included the 7.4% of metal valves, the 9.0% of switch gear, switchboard & industrial controls equipment, and the 6.4% of motors & generators.
The good news of May’s -2.5% yearly drop by the price index for raw industrial materials masked price lift-offs of 48.9% for natural gas, 13.7% for nonferrous metal ores, 9.9% for aluminum based scrap, and 7.3% for construction sand, gravel & crushed stone.