Stocks Rally on Tariff Relief and Inflation Data; Bonds Slightly Lower

Good morning,

The Dow (+3.4%), NASDAQ (+7.2%), and S&P 500 (+5.3%) all gained sharply, with the Dow and S&P 500 reaching positive territory for the year, while the NASDAQ remains -0.5% for the year.  Meanwhile taxable bonds fell 0.2% and tax-free municipal bonds were virtually unchanged.  The 10-year Treasure yield rose 0.06% to finish the week at 4.44%.

The markets rallied last week as tariff concerns seemingly and temporarily subside.  In addition, inflation data (Consumer Price Index [CPI] and Producer Price Index [PPI]) came in very tame.  CPI rose 0.2% over the prior month and 2.3% over prior year (Y/Y), which was the lowest Y/Y inflation reading since February 2021.  Similarly, the PPI data fell 0.5% over the prior month and rose 2.4% Y/Y, both of which were below economists’ expectations.  The core PPI, excluding food and energy, fell 0.1%, marking its first monthly decline since 2020.  Retail sales for April were much weaker than expected but may have been a result of the surge in March in advance of the tariffs.  All in all, these economic data provide support for the Fed to cut interest rates, which would likely boost the markets.

While not impacting the markets last week, news surfaced after the closing bell on Friday that is causing immediate and downward pressure on stock.  Moody’s downgraded US debt from its highest rating, following S&P’s downgrade, but back in August 2011.  When that happened 14 years ago, the stock markets got crushed and, ironically, the only asset class that gained was US debt (Treasuries).  We are seeing a similar but much lesser reaction, but that may have been tempered because of the weekend.  However, the timing is important, because Moody’s downgrade was associated with the amount of debt held by the US, and this occurred while Congress is voting on a large bill that could add to the US deficit and debt.  Therefore, this could create pressure on Congress to more carefully review the debt impacts associated with this bill.  That could make the vote on this bill even more interesting.

Have a great day and terrific week, and we hope that everyone has a wonderful Memorial Day holiday weekend.

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