Bloomberg Surveillance: CPI Reaction, Tariffs, and Fiscal Stimulus Impact on Markets

CPI and Inflation Outlook

• 💡 CPI data is presented as less significant than tariff news and emerging fiscal stimulus on Capitol Hill.
• ⚠️ Inflation is expected to rise in the short run due to tariffs, and again in 2026 due to renewed fiscal stimulus.
• 📈 Tariffs are seen as a significant economic shock, increasing the average effective tariff rate more than any time in a century, with adjustments taking a year or more.

Market and Investment Strategy

• 📉 US equities are not seen as particularly attractive due to higher tariff rates, slower long-term economic growth, and a significant premium over global markets.
• 🌍 Diversification is recommended, specifically into international equities and alternatives like infrastructure, transportation, and real estate.
• 📊 A 10-year Treasury yield between 4.50% and 5% is considered reasonable, with caution advised against being overly bullish on US equities.

Federal Reserve Policy and Rate Cuts

• ⏸️ The Fed is likely to be very cautious with rate cuts, as fiscal stimulus and tariffs suggest receding recession risk and potentially higher inflation.
• 🚫 A June or July rate cut is unlikely; the Fed will wait for more certainty on tariffs and stimulus before considering cuts.
• 📉 While at least one cut by the end of the year is possible, the Fed's target of 2% inflation and potentially rising consumption deflation above 3% limits reasons for aggressive easing.

Tariffs and Economic Impact

• 🇨🇳 Tariffs are expected to increase costs for imported goods, including appliances and building inputs, leading to higher housing costs.
• 📉 The overall impact of tariffs is seen as a growth shock, an inflationary shock, and a negative supply shock, leading to a real income squeeze and potential job losses.
• 🇺🇸 The US may end up with higher deficits, lower immigration, and slower economic growth due to current trade policies.

Congressional Priorities and Tax Policy

• 🏛️ The budget reconciliation bill faces challenges due to tight margins in the House, requiring consensus between Republicans and fiscal hawks.
• 💰 Potential tax revenue increases could come from capping corporate SALT deductions or addressing the carried interest loophole.
• 🚫 Campaign promises like no tax on social security benefits cannot be addressed in budget reconciliation and may be deferred to future proposals.