Wall Street Worries That Trump’s China Frustration is Just a Warmup: May 30, 2025

Investors are bracing for a potential heightening in trade tensions following President Trump expressing frustration with Beijing via social media by stating that China has totally violated its agreement with the US. Wall Street is worried that this Friday morning’s remarks are just a warmup of what’s to come, considering that the Commander in Chief’s onshoring ambitions are a direct threat to the manufacturing prowess of Washington’s rival in the Far East. Meanwhile, today’s economic calendar served as a volatility suppressor for markets, as fears that disputes concerning cross border commerce would reignite inflationary forces were hampered again. Indeed, PCE and UMich results pointed to lighter price pressures amidst softer-than-projected cost expectations for the years ahead. But the optimism was tempered by a household spending slowdown, which was also evident in a dramatic narrowing in the trade deficit, reflecting individuals and corporates frontloading their goods orders in March to avoid liberation tariffs the next month. Traders are hesitant against this backdrop, paring back their exposures to overall stocks and commodities ex-lumber, while they scoop up Treasuries across the curve as well as shares in the defensive healthcare, consumer staples and utilities sectors. Folks are also buying bullish greenback wagers and forecast contracts.

Inflation Fears Are Not Manifesting

April inflation was weaker than expected as the headline Personal Consumption Expenditures (PCE) price index arrived just a tenth higher than the Fed’s 2% target. It advanced 0.1% month over month and 2.1% year over year (y/y), in-line with estimates on the former but 10 basis points lighter on the latter. The core version of the indicator came in exactly as estimated, up 0.1% m/m and 2.5% y/y. Both annualized figures decelerated from 2.3% and 2.7% in the month prior. Supporting the overall disinflation were services, non-durable products and food which slowed and contracted at rates of 0.1%, -0.1% and -0.3% m/m. The deceleration was pivotal in countering the 0.5% m/m increases in durable goods and the energy component.

Softer Demand Is Helping to Subdue Pricing Power

Consumer spending, released in the same report, slowed down but remained positive in April. Real expenditures, which are adjusted for inflation, rose 0.1% m/m, decelerating from the sharp 0.7% gain in the previous period while arriving exactly as expected. Outlays were driven by volume upticks of 0.3% and 0.1% in services and nondurables but hampered by a 0.8% reduction in durables. Real personal incomes grew a strong 0.7%, however, on the back of increases in social benefits and wage gains, dwarfing the 0.2% median estimate and matching the prior month’s result. The gap between outlays and incomes drove the personal savings rate to 4.9%, the highest level since achieving the same result last May.

Weaker Goods Volumes Weighed on Imports

The goods trade deficit narrowed to -$87.62 billion in April following the -$162.25 billion record recorded in March, prior to President Trump’s liberation day tariffs being announced. A significant reduction in imports, due to frontloading in the months prior, drove the headline number south.

Consumers Feel Better on Trade Progress, Stock Gains

The University of Michigan’s Consumer Sentiment Index was upgraded this morning two weeks after its preliminary result was published. The headline reading was upwardly adjusted to 52.2 from 50.8, reflecting improvements in the benchmarks for current conditions and projections for the future, which were revised from 57.6 and 46.5 to 58.9 and 47.9. Inflation expectations also dwindled in the final update, lessening from 4.6% and 7.3% over 1- and 5-year periods, to 4.2% and 6.6%.

Chicago Economy Remains Weak

The Chicago Purchasing Mangers’ Index, which covers both the services and goods producing industries, weakened last month as softer orders drove lighter production volumes. But employment and backlogs served to soften the blow, as the headline reading came in at 40.5, missing the median estimate of 45 and arriving below the prior month’s 44.6. April marked the 17th consecutive month of the indicator coming in beneath the explanation-contraction threshold of 50. 

Beijing Will Not Play Ball with Trump

One feature of my optimistic economic growth outlook has been the US maintaining an adversarial posture towards Beijing. President Trump’s onshoring ambitions are a direct threat to China’s share of global manufacturing production, which is what drove the nation’s growth in the past few decades. The Communist party knows that bending to the US Commander in Chief essentially sacrifices the country’s driver of progress. Still, Washington can afford to maintain a conflict with its Far East rival, like it did during Trump 1.0, an era of little inflation and certain quarters sporting GDP rates north of 4%. I believe cementing trade deals with the EU, India, Japan, South Korea and other partners in the coming months will reduce the disappointment associated with the persistent grapple across the Pacific.

International Roundup

Canada Reports Positive Growth

Canada’s GDP expanded 0.1% m/m in March and 0.5% quarter over quarter to start the year. The figures were in-line with expectations and were influenced by positive contributions from exports, business inventories, consumer spending and capital expenditures related to machinery and equipment. Corporate investment in commercial real estate was a drag, alongside residential construction. The first quarter’s growth rate matched the final three months of last year’s.

Seoul and Tokyo Report Weaker Manufacturing

Industrial production figures from Tokyo and Seoul declined in April, although annualized numbers remained positive. Output retreated 0.9% m/m across both countries, while economists expected a gain of 0.5% in South Korea and a contraction of 1.4% in Japan. The implementation of tariffs and their associated trade uncertainty weighed on manufacturing activities. Y/y results came in at 0.7% in Japan and 4.9% in South Korea.