The stock markets’ assessment that President Trump’s tariffs were excessive proved to be correct. Trump backed down on his 145% import tariffs on China on May 13, when the US and China started talks. The UK and the US also reached an agreement on the tariffs and announced a partial trade deal on May 8. Talks were held with several trading partners in May as the July deadline approached.
Trump expressed renewed frustration as talks with the EU and China made slow progress. He threatened to raise import tariffs on EU countries to 50% if talks failed to speed up. At the end of the month, a US trade court ruled that the bulk of President Trump’s tariffs were illegal. According to the court, the President had overstepped his powers by imposing general tariffs on imports by the country’s trading partners. The following day, however, a federal appeals court temporarily suspended the enforcement of the lower court’s order.
The uncertainty related to trade relations has so far only had a limited impact on economic activity. In the Fed’s Nowcast forecast the US GDP growth rate in the second quarter has fallen only slightly, from 2.85% to 2.42%. Manufacturers’ orders have declined, but current activity remains high. Personal consumption has continued to grow, and consumer confidence has recovered from its slump. There has been little change in employment figures. Economists reduced the probability of a recession, and corporate earnings growth is expected to remain positive. According to LSEG I/B/E/S, the consensus estimates for S&P 500 companies’ earnings growth in the second quarter are +5.5%, which should rise slightly during the second half of the year.
Trump’s agenda faces headwinds
As expected, Trump’s decisions and policies have faced headwinds. Tesla CEO Elon Musk is leaving the Department of Government Efficiency (DOGE) as its efficiency initiative has met with legal setbacks, experienced clashes with Cabinet members and provided only little evidence of achieving savings or government efficiency. A judge banned Trump’s administration from ordering or finalizing mass layoffs at most major federal agencies for the time being.
The number of deportations of immigrants entering the country has risen, but it is still far from the ten million promised by Trump in his campaign speeches. By contrast, the number of people arriving in the US has plummeted. The Trump administration got its claws into Harvard University and is slashing its funding. The peace talks between Ukraine and Russia broke down.
The One Big Beautiful Bill Act (OBBBA), a proposed budget reconciliation bill, is emerging as a new touchstone. The bill is estimated to add several trillion dollars to US debt. The bill extends several tax cuts and jobs provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act and are set to expire at the end of 2025. The bill includes significant cuts to the federal Supplemental Nutrition Assistance Program (SNAP) and Medicaid health insurance program. Clean energy tax credits will be cut, and the state and local tax (SALT) deduction cap will be raised. The budget bill was passed by a narrow majority in the House of Representatives and will next head to the Senate.
Concerns about federal debt management have been building in the fixed-interest market. Credit ratings agency Moody’s downgraded the US sovereign credit rating by one notch to Aa1. At the end of May, the yield of the US 10-year government bond closed at 4.41%, which was a rise of approximately 0.2 percentage points compared to the previous month. The Fed held its key interest rate unchanged. The US dollar remained more stable after its weakening in April. The S&P 500 equity index rose 5.5%.
Image of the month: S&P 500 fluctuated in response to tariff news
