The Rhino Report - The Only Certainty is Uncertainty

The S&P 500 finished the holiday-shortened week up 1.88% on mixed economic data.

The EU Tariff Saga: Last week, President Trump announced plans to impose a 50% tariff on all European Union imports starting June 1, citing stalled trade negotiations and concerns over unfair trade practices. Over the weekend, following a call with European Commission President Ursula von der Leyen, President Trump agreed to delay the 50% tariff until July 9, allowing more time for negotiations.

Tuesday, President Trump indicated progress in U.S.–EU trade discussions, commending the EU for promptly scheduling meetings. This optimism contributed to a rally in U.S. stock markets.

Wednesday, the U.S. Court of International Trade ruled that President Trump's "Liberation Day" tariffs exceeded presidential authority under the International Emergency Economic Powers Act, declaring them unlawful. Thursday, a federal appeals court granted a stay on the lower court's decision, allowing the tariffs to remain in effect temporarily while the administration appeals the ruling.

The week's ping-pong of policy announcements and legal challenges demonstrates that in today's environment, the only certainty is uncertainty.

Against this backdrop of policy uncertainty, this week's economic data painted a mixed picture:

Consumer Confidence: The Conference Board reported a significant rebound in consumer sentiment for May, with the Consumer Confidence Index rising to 98.0 from 85.7 in April. This improvement was driven by increased optimism about future business and labor market conditions.

Durable Goods Orders: April's data showed a 6.3% decline in durable goods orders, indicating potential softness in manufacturing and business investment. It's unclear how much of this slowdown is attributable to trade policy uncertainty and how much reflects the underlying domestic economy.

GDP (Q1 2025): Thursday, the Bureau of Economic Analysis revised its estimate for first-quarter GDP, indicating that the U.S. economy contracted by 0.2% in the first quarter, a slight improvement from the initial estimate of a 0.3% decline. The contraction was primarily due to a surge in imports that widened the trade deficit, which subtracted 4.9 percentage points from GDP.

Corporate Profits: Also on Thursday, the Bureau of Economic Analysis revised its estimate for first-quarter corporate profits, showing profits fell by 2.9% in Q1, marking the largest drop since the 2020 pandemic downturn. The decline in profits is attributed to several factors, including a significant surge in imports ahead of anticipated tariffs, slower consumer spending, and increased business costs.

Initial Jobless Claims: Claims increased by 14,000 to 240,000 for the week ending May 24, the highest level since November 2021, indicating potential softening in the labor market. A detailed breakdown of weekly jobless claims is in the data section below.

Personal Income and Outlays: On Friday, the Bureau of Economic Analysis reported that in April, personal income rose by 0.8%, or $210.1 billion, driven primarily by increases in government social benefits and private sector wages. Disposable personal income (DPI) also increased by 0.8%, while personal consumption expenditures (PCE) grew by 0.2%, reflecting a $47.8 billion rise in spending, mainly on services. The personal saving rate climbed to 4.9%, up from 3.9% in March, indicating that consumers are allocating a larger portion of their income to savings.

The PCE Price Index, the Federal Reserve's preferred gauge of inflation due to its comprehensive coverage and ability to reflect changes in consumer behavior, increased by 0.1% for the month and 2.1% year-over-year. Core PCE, which excludes food and energy prices, also rose by 0.1% monthly and 2.5% annually.

The story here is simple: people are banking their extra income instead of spending it. So even though incomes are growing nicely, spending isn't keeping pace because consumers are being cautious and building up their savings.

Steel: Friday, President Trump announced a significant escalation in trade policy, doubling tariffs on steel imports from 25% to 50%. This move, effective June 4, aims to bolster domestic steel production and protect American jobs.

The Big So What?

This week perfectly illustrates how policy uncertainty has become the dominant force shaping economic behavior. Companies rushed to import goods ahead of potential tariffs, inadvertently dragging down GDP and corporate profits in Q1. Consumers feel optimistic about the future but are defensively stockpiling cash rather than spending. Businesses are pulling back on equipment orders. The pattern is clear: when policy can change with a social media post or court ruling, everyone goes into defensive mode.

For portfolios, this creates a challenging environment where traditional economic relationships don't hold. Strong consumer confidence usually predicts increased spending - except when people are worried about policy volatility. Rising imports typically signal economic strength - except when they're driven by tariff fears. Even positive policy announcements can reverse within days, as we saw with the EU tariff delay and subsequent court challenges.

In this environment, diversification becomes even more critical, and cash reserves more valuable. We're not just managing market risk anymore - we're managing policy implementation risk, legal challenge risk, and the risk of sudden reversals. The key is maintaining flexibility while staying disciplined about long-term objectives.

Watch the four-week average of jobless claims - if it breaks above 250,000, it could signal that policy uncertainty is finally translating into meaningful economic weakness. Until then, expect continued volatility as markets try to price in policies that may or may not survive their next legal challenge.

By The Numbers

Employment Indicators

Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.

Note: Values above 250K for the 4-Week Average, combined with rising unemployment, would signal a weakening economy. Next unemployment report: June 6, 2025. Source: Department of Labor

Economic Growth (Real GDP)

GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Q2 estimate from Federal Reserve Bank of Atlanta

Inflation Measures (CPI Year-over-Year)

Source: Bureau of Labor Statistics; May estimate from Federal Reserve Bank of Cleveland

Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.

Interest Rate Outlook

Current Fed Funds Rate: 4.25-4.50%

Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool

Corporate Earnings Outlook (S&P 500 Estimates for 2025)