Weekly Economic Snapshot: Inflation Cools While Sentiment Cautiously Climbs

Meanwhile, the S&P 500 experienced a positive trajectory for most of the week, driven by encouraging global trade updates, and ultimately achieved more than a 6% gain for the month. This market performance contrasted with the U.S. economy’s Q1 contraction. Overall, the week highlighted a delicate balance between easing price pressures and cautious consumer outlooks, all while trade news influenced market movements.

Inflation, as measured by the Federal Reserve’s preferred metric, cooled to its lowest level in over four years. The Core Personal Consumption Expenditures (PCE) Price Index, which excludes volatile food and energy costs, rose 2.5% year-over-year in April. The latest reading was in line with the forecast and a slowdown from March’s 2.7% growth. On a monthly basis, core prices also came in as expected, increasing 0.1%. Meanwhile, the headline PCE Price Index saw a 2.1% annual increase, its lowest level since September. This was below the expected 2.2% growth and a slow down from March’s 23% growth. Monthly, the headline index also rose by 0.1%, as predicted. Despite last month’s cooling, minutes from the Fed’s May meeting showed policymakers are still concerned with potential tariff inflation and will likely remain in “wait-and-see” mode.

Conference Board Consumer Confidence Index

The Conference Board Consumer Confidence Index® saw its largest monthly increase in over four years in May, jumping 12.3 points to 98.0. This marks the first monthly rise since November and significantly exceeded the expected forecast of 87.1.

The major jump this month was primarily fueled by the Future Expectations Index, which saw improvement in all three of its components: business conditions, employment prospects, and future income. With that said, the Expectations Index remains below the threshold that typically signals a recession ahead. Within the Present Situation Index, views on current business conditions improved, while perceptions of the labor market weakened for a fifth straight month.

Other notable takeaways from May’s survey showed tariffs remain top of mind for consumers. While inflation and high prices remain a key concern, 12-month inflation expectations cooled to 6.5% from 7.0% in April. And lastly, the May 12th trade deal helped boost the rebound in sentiment, as consumers’ outlook on stock prices improved significantly following the announcement.

University of Michigan Consumer Sentiment Index

Consumer sentiment was unchanged from April, ending four straight months of declines. The Michigan Consumer Sentiment Index remained at 52.2 in May, its fourth lowest reading on record. The latest reading was better than the preliminary reading of 50.8 earlier in the month, highlighting increased optimism during the latter half of the month specifically following the US-China trade deal from May 12th.

The current conditions index inched lower for a fifth straight month, hitting its lowest level since 2022. Meanwhile, the expectations index rose for the first time in six months, but still hovered near historically low levels as consumers remain worried about the future.

Inflation expectations for the year ahead rose from 6.5% in April to 6.6% in May, the highest level since 1981. However, this was the smallest monthly increase since November and ends a four-month streak of large monthly increases of 0.5% or higher. Inflation expectations over the long run fell to 4.2%. This is the first monthly decline since December but the second highest level since 1992.

The Consumer Discretionary Select Sector SPDR ETF (XLY A) is tied to consumer confidence.

The U.S. economy contracted for the first time in three years to start of 2025. According to the second estimate, real GDP inflation-adjusted measure of all goods and services produced in the U.S.—contracted at an annual rate of 0.2% in the first quarter of this year. This reflects a significant slowdown from Q4’s 2.5% growth but was slightly higher than the -0.3% forecast.

In Q1, two of the four components made negative contributions to real GDP. Net exports were the primary driver behind last quarter’s contraction, as imports surged in the first three months of the year ahead of anticipated tariffs. Government spending also declined, though less than initially estimated. Partially offsetting these declines were increases in consumer spending, business investment, and exports. While still positive, consumer spending was weaker than previously reported but business investment was stronger than expected.

The S&P 500 bounced back last week, gaining 1.9% from the previous Friday. As a result, the SPDR S&P 500 ETF Trust (SPY A) rose 1.8% last week. Meanwhile, the S&P Equal Weight Index was up 1.2% from the previous week and the Invesco S&P 500 Equal Weight ETF (RSP A-) rose 1.2%.

The 10-year Treasury yield finished the week at 4.41%, while the 2-year note finished at 3.89%.

The CME FedWatch Tool currently shows a 98% likelihood that the Fed will hold rates steady at their next meeting in June. Markets are pricing in two 25 basis point cuts for later this year coming at the September and December meetings. Additionally, two 25 basis point cuts are projected in 2026.

The labor market takes center stage this week, with the widely watched May jobs report as the main event on Friday. This report, alongside the JOLTS release, ADP’s private payroll data, and initial jobless claims, will provide critical insights into the labor market’s health. Additionally, S&P Global and the Institute for Supply Management will release May’s Manufacturing and Services PMI readings, offering a glimpse into the economic activity of both sectors.

Originally published on Advisor Perspectives.

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