Financial News for the Week of May 16th, 2025

Following the U.K. trade deal signed last week, the U.S. de-escalated its tariff fight with another key trade partner this week – China. Stock markets rejoiced on the news with the S&P 500 up almost 5% this week.

The U.S. and China announced a temporary truce, which would see both nations significantly reduce their tariffs for 90 days, effective May 14th. U.S. tariffs on China would drop from 145% to 30%, while Chinese tariffs on U.S. goods would fall from 125% to 10%. China also agreed to ease its critical minerals export restrictions. This development marks a major step in the right direction. Still, it is early days in negotiations and there’s potential for trade tensions to flare up again should an agreement prove elusive. Additionally, some of the damage is already done, with elevated tariffs that were kept on for several weeks already disrupting trade patterns and setting the stage for potential price hikes ahead. Recognizing these risks, at a speech this week Fed Chair Powell noted that “we may be entering a period of more frequent, and potentially more persistent, supply shocks – a difficult challenge for the economy and for central banks”.

Up until April, inflation appeared to be moving in the right direction. Helped by a reduction in energy prices, total CPI inflation eased to 2.3% year-on-year (y/y) in April – the lowest level since 2021 in financial news. Meanwhile, core CPI held steady at 2.8% y/y, but managed to trend lower on a 3-month annualized basis (Chart 1). Still, this trend is unlikely to last. Citing pressure from tariffs, Walmart announced plans to start passing on tariff costs as early as this month. Other retailers are likely to follow, and consumers will soon start to feel the heat.

With respect to the consumer, following a strong finish to the first quarter, retail sales grew only modestly in April. Sales at motor vehicle and parts dealers edged lower (albeit from an elevated level), while sales at gasoline stations fell more noticeably in part due to lower gas prices. Despite this, a decent showing in a few other categories, including bars and restaurants, and building material stores helped provide some counterbalance.

Pulling back the lens, last month’s retail spending data provided further evidence that consumers continued to front-run the tariffs by pulling forward purchases of some big ticket items. Meanwhile, ongoing gains in discretionary spending suggest that the consumer is managing to hold its own for now, despite downbeat sentiment. Housing starts also managed to eke out some modest growth in April (up 1.6% on the month), but under the hood, the details were mixed. Starts in the larger single-family sector continued to trend lower, with last month’s increase entirely stemming from gains in the smaller and more volatile multifamily segment (Chart 2).

All told, the de-escalation in the trade fight with China marks an important step in the right direction, and there could be more on the way, with President Trump today hinting at the potential for further de-escalation with other countries over the next 2-3 weeks. Still, this does not rule out additional flareups, and we are far from being out of the woods.