U.S. Indices pared from record highs seen during US trade on Friday as US President Trump terminated trade discussions with Canada over their Digital Services Tax on US tech. This announcement saw stocks trim earlier gains but still finished the Friday session in the green. Sectors were mixed, with Consumer Discretionary outperforming while Energy lagged. Upside in discretionary was led by Nike (NKE) after earnings and revenue guidance topped expectations, and signalled a plan to reduce exposure to China amid the trade tensions. Crude prices settled flat/up, but well off the earlier peaks on reports that OPEC+ are set to consider another 411k BPD in August, matching the production increase announced for July. Elsewhere, T-notes were choppy but ultimately bear steepened amid US data, the aforementioned trade update and OPEC+ sources, while attention turns to the Senate, who look set to vote on Trump’s bill on Saturday. On US data, headline PCE numbers were in line, but the core metrics were slightly hotter than expected, bolstering the “wait-and-see” approach the majority of the Fed are taking, other than Governors Waller and Bowman. Fed’s Kashkari spoke, he still sees two cuts this year, with the first possibly seen in September, but they could pause after the first cut if tariff effects appear later. The Final University of Michigan Consumer Sentiment saw little revisions to sentiment, while the 1 Year and 5 Year inflation expectations were revised down a touch. In FX, the Canadian Dollar was a clear laggard given the Trump trade talk termination, while the Dollar was flat with weakness also seen in the Australian Dollar, with marginal outperformance in the Euro. Attention this week lies on Canada’s response to Trump, Trump’s tariff figure to be announced on Canada, US NFP and ISM PMIs ahead of Independence Day. Core PCE rose by 0.2%, above the 0.1% forecast and accelerating from the prior 0.1%. Note, unrounded Core PCE rose by 0.1788% vs the prior 0.1159%. The Y/Y print rose to 2.7%, above the 2.6% forecast, while the prior was revised up to 2.6% from 2.5%. The headline numbers were in line, rising 0.1% M/M, matching the prior pace, with the Y/Y rising 2.3% Y/Y, accelerating from the upwardly revised 2.2% (initially 2.1%). The hotter-than-expected Core PCE print is worth watching as it is the Fed’s preferred gauge of inflation, and it clearly is remaining sticky above the Fed’s 2% target around these levels. There are concerns ahead that the impacts of tariffs will start to boost price pressures. Fed Chair Powell said they would expect to see meaningful tariff inflation effects in June, July, and August; If they not see that, that would lead to cutting earlier. Some on the Fed, namely Governor Waller and Bowman, have suggested cutting rates as early as July. However, this view is not shared among others on the FOMC (at least from those whom we have heard from). However, given sticky inflation above the Fed’s target, and no sign of a deteriorating labour market yet, the Fed will likely continue to argue for a wait-and-see approach, versus the dovish argument for acting now as tariffs are set to result in a one-time price increase and thus should be looked through. Meanwhile, Wall Street Journalist Timriaos highlights how goods prices are no longer helping and have started to contribute to inflation, as measured on a 12-month basis. Elsewhere in the report, Personal Income fell 0.4%, beneath the expected 0.3% rise, with prior revised down to 0.7% from 0.8%. Consumption (adj.) fell by 0.1%, beneath the +0.1% forecast. Real consumption fell by 0.3%, down from the prior 0.1% gain. The Final UoM for June saw sentiment little changed, moving slightly higher to 60.7 from 60.5, versus the consensus for an unchanged print. Expectations tilted slightly lower to 58.1 from 58.4, while conditions lifted to 64.8 from 63.7. Inflation expectations ticked lower across both time horizons, with the 1 Year printing 5.0% (prev. 5.1%) and the 5 Year 4.0% (prev. 4.1%). Within the report, it notes consumer views are still broadly consistent with an economic slowdown and an increase in inflation to come. Consumers continue to be concerned about the potential impact of tariffs, but at this time they do not appear to be connecting developments in the Middle East with the economy. Fed Member Kashkari continues to expect two rate cuts in 2025, with possible first cut in September, and if the Fed cuts in September and tariff effect shows up later, the Fed could pause rate cuts. The Minneapolis President added official data so far reveals only modest impact of tariffs on prices, activity and labour market, and more time is needed to determine if effects of trade war are delayed, or if it will be smaller than thought. Kashkari added that emphasis must be on actual inflation and real economic data without committing to an easier policy path in case tariff effects are delayed. Overall, and while Kashkari has already spoken this week, he continued to toe a very similar line to Chair Powell and the wider majority of Committee members, continuing to leave Waller and Bowman as the dovish outliers, who have been touting a July reduction. Elsewhere, Oil ended Friday with a small 0.43% gain while Gold was soft, ending the week with a loss of 1.5%.
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