Stock Market Stumbles Amid Inflation and China Trade News

The stock market seems to be in need of fresh catalysts.

Since early April, the rally of the S&P 500 has largely relied on hopes that an unexpected trade deal would catch sellers off guard. After President Trump announced the suspension of mutual tariffs on April 9, the benchmark index surged by 21%. However, this optimism may be fading, as some investors could be left feeling disappointed with the developments.

This uncertainty around tariff effects appears when inflation reports come in softer than expected, alongside what would have been promising news regarding trade with China. Initially, the S&P 500 showed gains, but it dipped again by the end of the session.

The latest Consumer Price Index (CPI) data indicated that last month’s inflation was relatively subdued, yet there’s a prevailing sentiment that tariffs could reignite inflation later this year. Although progress in negotiations with China is welcome, President Trump’s remarks about tariffs have left many underwhelmed.

Doug Kass, a seasoned hedge fund manager with decades of experience, noted that the market’s lack of reaction to inflation and the trade news might not sit well with investors. He has a rich history in the market, dating back to the 1970s, and was once the research director at Omega Advisors.

After observing the day’s market shifts, Kass offered some candid thoughts that might not please everyone.

The Federal Reserve is tasked with managing both inflation and unemployment through adjustments to the Fed fund rate. Raising the rate can slow economic activity and curb inflation but may increase unemployment. Conversely, lowering rates can boost GDP and reduce joblessness, though inflation may rise as a consequence.

This balancing act has the Fed in a tricky position this year. After the most hawkish monetary policy since the 1980s, inflation dropped from over 8% in 2022 to below 3%. Yet, the unemployment rate saw an increase from 3.4% to 4.2% over the months.

Despite earlier expectations for more cuts in 2025, Fed Chair Powell had to halt further reductions due to concerns about persistent inflation and rising costs.

This situation has led many Wall Street economists to adjust their expectations for rate cuts this year.

The CPI report revealed that inflation grew by just 0.1% in May, falling short of the anticipated 0.2%. However, the annual headline CPI showed a rise to 2.4%, up from 2.3% in April. Similarly, core CPI—which excludes volatile food and energy prices—remained at 2.8%, consistent with April figures.

Interestingly, this isn’t exactly groundbreaking news.

On a more positive note, some early-up stocks benefited from the lesser-than-expected increases, suggesting that the impact of tariffs on inflation may have been overstated. Additionally, news from London indicated progress in talks between U.S. and Chinese officials regarding rare earth minerals crucial for electric vehicles and other advanced technologies.

President Trump commented on this agreement, stating that the contract with China would await final approval from himself and President Xi, highlighting the potential for advance supplies of necessary resources.

However, specifics about the deal remain unclear, raising doubts about its potential to relieve tariffs on Chinese goods.

“We’ve got a total of 55% tariffs while China has only 10%,” Trump pointed out.

Kass has seen his fair share of market ups and downs. He’s navigated inflation in the 1970s, the interest rate hikes of the 1980s, the S&L crisis, the internet boom and bust, the Great Recession, the onset of COVID-19, and a bear market in 2022.

This experience helped him predict the recent market volatility and earlier forecast that stocks would rebound in April.

Despite this, he remains skeptical about how recent inflation trends play out for the S&P 500.

“The market seems to be pricing in better-than-expected core CPI outcomes,” Kass stated. He believes this data may not excite stock traders, as companies are likely absorbing increased costs, heightening concerns over profit margins.

Kass also mentioned a notable imbalance in trade, indicating that importers stocked up in anticipation of Trump’s tariff announcements back in April. Thus, the current data may still reflect inventories acquired before tariffs took effect.

“Once that stockpile depletes, firms will face higher costs, and inflation will spike again,” he warned.

No significant outcomes emerged from the China Conference either, according to Kass, who described it as a complete non-event without any evidence of reduced tariffs.

Without easing tariffs, companies will grapple with tighter revenue streams and may not feel motivated to support a vigorous rally, given that revenue growth is a cornerstone of stock valuations.

Related: Veteran Fund Manager Refresh Stock Market Forecasts