Federal Reserve Standing Pat
The Federal Open Market Committee voted unanimously yesterday to keep short term interest rates stable at 4.25-4.5%. The Fed has now left rates unchanged for a third straight meeting and at the same level since December. The post-meeting statement noted how volatility and tariff gyrations are factoring into policy decisions as uncertainty about the economic outlook has increased further. While the risks of higher unemployment and higher inflation have risen, the Fed acknowledges that recent indicators suggest that economic activity has continued to expand at a solid pace. That sounds cautious but not overly concerned.
In his follow up press conference, Fed Chairman Powell noted that labor markets seem to be in balance and consistent with full employment. Inflation is still somewhat elevated as the core inflation rate (PCE) is up 2.6% over the last twelve months. The caution comes as near-term inflation expectations have moved higher. In the end, however, the Fed noted that it is not in any hurry to change policy as there is still too much uncertainty on tariffs.
Trump Telegraphs Tariff Timing
Just last night, the Trump administration remarked that it is looking to rescind previous curbs on AI semiconductor chip sales. It will not enforce the Biden-era AI “diffusion rule” (regulate exports, mitigate national security risks) but will instead overhaul semiconductor trade restrictions. Stocks reacted positively to the Fed decision and discussion yesterday, but have also been supported by news that US and Chinese officials will meet in Switzerland this weekend to discuss trade. These are not expected to be advanced discussions but instead focus on de-escalation. We may also hear about a trade deal with the U.K. today. So far, the S&P 500 is up 1.1% this month to date along with a 1.7% rise in the Nasdaq and 1.3% for small cap stocks. For the quarter so far, the S&P 500 is up 0.35%, but down about 4.3% year to date, while the Nasdaq is down about 8.1% year to date and small cap stocks are down close to 11%.
Manheim: Steamroller
A closely watched barometer of used vehicle pricing jumped last month to its highest level since October 2023 as consumers rushed purchases amid fears of price hikes due to auto tariffs. Cox Automotive’s Manheim Used Vehicle Value Index, which tracks prices of used vehicles sold at its U.S. wholesale auctions, increased 4.9% last month compared with a year earlier. It also marked a 2.7% increase from March. This was a significant increase compared with a typical monthly move of 0.2%. The Spring bounce normally ends around the second week of April, but this year, wholesale appreciation trends continued for the entire month and steamrolled over typical observations.
While tariffs of 25% on new imported vehicles and many parts do not directly impact used car sales, changes in new vehicle prices, production and demand affect the used car market, where the majority of Americans purchase a vehicle. Retail used-vehicle sales in April increased by a sizeable 13% over last year. Over the last four weeks, the average retail listing price for a used vehicle increased to more than $25,000. That is still much less than a new vehicle price of nearly $48,000. The Manheim index remains off the record highs it hit during the Covid pandemic, but is still relatively elevated compared to pre-Covid levels, suggesting pre-tariff accelerated car buying.
Where There is Smoke
First quarter earnings season has so far come in better than feared with growth of 12.8% vs the 7.2% initially expected. Several factors have contributed to this upside including tariff mitigation measures, AI capital expenditures, resilience of the consumer and elevated company margins. Stockpiling of goods and pre-tariff buying could also provide some cushion in the second quarter. At the same time, tariffs have driven corporate uncertainty. Goldman Sachs noted that 24% of the 357 S&P 500 companies that have reported thus far have mentioned the word “recession” on their conference calls, up from just 2% last quarter. The consensus sees earnings growth picking in the second half of the year after a pause, but not all are in agreement on the progression.
While the Papal Conclave in Rome was unable to reach a consensus yesterday as black smoke signaled no decision, Federal Reserve voting members seem to be in full agreement on the near-term path of monetary policy. We should get a glimpse of the pace of trade progress this week for the U.K. and China. Although, we will have to wait a while longer before we see white smoke from the Fed regarding any decision to deviate from its current interest rate policies.
David Attenborough turns 99, and singer Enrique Iglesias turns 50 today. Former President Harry S. Truman was born this day way back in 1884. The Dow Jones Industrial Average debuted in May of 1896, 12 years after Truman was born, and ended the first year at 40.45, down 1.2%.
Christopher Crooks, CFA®, CFP® 610-260-2219