16.05.25 - Next Trigger - the Consumer

US consumers seem to become increasingly worried. The index of consumer sentiment dropped to 50.8, down from 52.2 in April, in the preliminary reading for May. Year-ahead inflation expectations rose to 7.3% from 6.5% last month, while long-term inflation expectations ticked up to 4.6% from 4.4%. The rise likely reflects growing concerns that recently announced tariffs will drive prices higher.

The CFO of Walmart addressed in an interview yesterday, that 30% tariffs are still to high, even with the recently announced trade deal to lower duties on imports from China to 30% for 90 days. You’ll begin to see that, likely towards the tail end of this month, and then certainly much more in June.

Markets: US indices continue their 5 day winning streak, US dollar up, while interest rates trading sideways between 4.4 to 4.5%.

My view: The US consumer is a critical pillar of the economy, accounting for nearly 70% of GDP through personal consumption. A sharp decline in consumer sentiment, paired with rising inflation expectations, is a clear warning signal. It suggests that households are increasingly concerned about their purchasing power, especially in light of the renewed tariff tensions. I share the view that expecting no price increases would be rather unrealistic.

If these concerns begin to curb consumer spending, it could weigh heavily on economic growth in the months ahead. One key question is whether consumers have already front-loaded their purchases in anticipation of higher prices, something we’ll only know in the near term.

For now, markets are completely ignoring these warning signs, which is typical behavior in phases of excessive market euphoria.

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