Uncertainty Persists Amid New Inflation Data, Court Ruling on Tariffs

Matthew Rubin Chief Investment Officer

 

1. April PCE inflation came in below expectations at 2.1%, muting concerns about persistent inflation and keeping the focus on the Fed rate path.
2. A U.S. court ruled against key Trump-era tariffs, raising questions about trade policy and lifting markets.
3. Revised data shows that the U.S. economy shrank just 0.2% in Q1, less than initially stated.

 

1. Market Speculates About Fed’s Next Move as New Economic Data Emerges

Inflation was back in focus last week with the release of the Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures (PCE), for April. The data, released on Friday, showed that headline PCE came in below expectations at 2.1%, compared to forecasts of a 0.15% month-over-month and a 2.2% year-over-year increase. Core PCE, which excludes food and energy, rose by an expected 0.1%, following an increase of the same amount in March.¹

In May, the Consumer Price Index (CPI) reading showed limited effects from tariffs, with annual CPI inflation at 2.3%, its lowest since February 2021. While we expect tariffs to push prices higher in the coming months, we view this as a one-time adjustment rather than a long-term inflation risk. As such, the Fed is likely to look past temporary price increases caused by tariffs and stay on track with its policy normalization. Markets are currently pricing in two Fed rate cuts in 2025.

2. Court Tariff Ruling Lifts Markets

A surprise ruling by a U.S. federal court last week overturned much of the legal basis for President Trump’s sweeping tariffs, prompting a positive reaction in global markets. The court found that Trump had overstepped his authority in using emergency powers to impose broad tariffs on major trading partners. While the Trump Administration plans to appeal and many other tariffs remain in effect, the court’s decision added a new twist to an already unpredictable trade landscape.

Equity markets climbed following the news, with investors hoping the ruling would reduce trade friction. We view this as a prime example of today’s narrative-driven market, where headlines can cause quick swings in sentiment that impact market movements. We recommend that investors watch and wait until more clarity emerges on how the legal and policy process will unfold.

3. U.S. Economy Shrank Less Than Reported

Revised first-quarter 2025 GDP data shows that the U.S. economy shrank less than initially reported, declining by 0.2% versus the earlier estimate of a 0.3% drop.² The slight improvement can be attributed to stronger U.S. exports and business inventory gains, even as consumer spending and government activity slowed.

The dip in GDP growth was mainly due to a significant increase in imports, as companies rushed to purchase goods ahead of potential new tariffs. Imports create a drag on GDP calculations. Still, this revision doesn’t change the overall picture much: The economy slowed from late last year, but not dramatically.

For the period ending 5/30/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ The Wall Street Journal
² Barrons

Disclosures

Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
These materials are furnished for informational and illustrative purposes only, to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. Materials have been compiled from sources believed to be reliable; however, Cary Street Partners does not guarantee the accuracy or completeness of the information presented. Such information is not intended to be complete or to constitute all the information necessary to evaluate adequately the consequences of investing in any securities, financial instruments, or strategies described herein.
Cary Street Partners and its affiliates are broker-dealers and registered investment advisers and do not provide tax or legal advice; no one should act upon any tax or legal information contained herein without consulting a tax professional or an attorney.
We undertake no duty or obligation to publicly update or revise the information contained in these materials. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index.
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 2000^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_11