The Freeze and Thaw Cycle

Breaking the ice with China... A weekend in Switzerland... The Fed show... Powell: 'We just don't know'... One case for rate cuts... The housing market is frozen...

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They've agreed to talk...

After the market closed yesterday, the U.S. and China announced that officials plan to meet in Switzerland on Saturday and Sunday to start discussing the big market topic of the year thus far: tariffs.

Treasury Secretary Scott Bessent and U.S. trade representative Jamieson Greer will meet with Chinese Vice Premier He Lifeng, who oversees the details of the country's economy. Bessent said on Fox News last night...

My sense is that this will be about deescalation, not about the big trade deal. But we've got to deescalate, before we can move forward.

Seeing as President Donald Trump is the one who slapped new tariffs eventually totaling 145% on China this year, we'd love to be a fly on the wall in the room during these talks to hear Chinese leaders' response. Nevertheless, the fact that both sides have agreed to meet at all is important. It signals a motivation to reach a compromise on matters related to "Liberation Day."

This meeting is no guarantee that anything else will happen... But it appears encouraging.

Trump has also signaled recently that tariffs won't be nearly as high as he'd announced on April 2 by holding up a chart with exceedingly high rates on all of the U.S.'s major trading partners and a minimum 10% blanket tariff on the rest of the world.

Earlier this week, we pondered: 'Deals or no deals?'...

So far, despite promises from the White House that trade agreements are in the works and Trump saying China won't face anything close to a 145% tariff in the future, the answer has been "no deals."

A week ago, Commerce Secretary Howard Lutnick said in a television interview that he had one deal done – with India, it sounded like – but was waiting on approval from the country's leaders. (A pesky detail.)

Instead, yesterday, India agreed to a new trade deal with the U.K., which lowered tariffs on key exports such as whiskey and cars. In the agreement, India will gradually lower taxes on imports from the U.K. with the idea of trade becoming "fully tariff-free" this decade.

You could take this as a possible sign of things to come related to trade with the U.S. – or that the rest of the world is doing its own thing without us.

Here's what Trump said in the Oval Office yesterday...

Everyone says, "When, when, when are you going to sign deals?" We don't have to sign deals. We could sign 25 deals right now... if we wanted. We don't have to sign deals. They have to sign deals with us. They want a piece of our market. We don't want a piece of their market. We don't care about their market.

OK. But he then repeated the timetable he has mentioned a few times recently – "two weeks" – for the next major steps in this tariff drama to play out... and indicated that the end result won't be all that bad...

In some cases, we'll sign some deals... For the most part, we're just going to put down a number and say, "This is what you're going to pay to shop." And it's going to be a very fair number. It'll be a low number. We're not looking to hurt countries. We want to help countries.

What the U.S. ultimately gets out of all this, we will see.

In the meantime, investors were happy with what they were hearing. The major U.S. stock indexes opened higher today.

Then there was the Fed show...

As nearly everyone had expected, the Federal Reserve kept its existing federal-funds rate range of 4.25% to 4.5%. But as we wrote yesterday, this Fed day was about looking for signals about what the central bank's policy might look like for the rest of this year.

In its policy announcement, the central bank acknowledged the influence of tariffs on that subject...

It noted that "swings in net exports" have affected GDP data, which it says otherwise "continued to expand at a solid pace." But, more notably, the Fed said, "Uncertainty about the economic outlook has increased further." Its policy-setting committee "judges that the risks of higher unemployment and higher inflation have risen."

In other words, the Fed envisions a world where unemployment and inflation might rise at the same time at some point in the future due to Trump's tariffs. The bad news: that sounds terrible.

The better news: the Fed, as we know, is not great at all at forecasting... and Fed Chair Jerome Powell acknowledged in his press conference that a lot "will depend on the size of the tariffs' effects" and "on how long it takes for them to pass fully into prices."

Stocks turned slightly lower at 2 p.m. Eastern time upon the Fed's new policy announcement, then rose modestly during and after Powell's post-meeting press conference. The benchmark S&P 500 Index finished 0.4% higher.

The important question in the near term...

Here's what the market really cares about: What does all this mean for Fed policy moving ahead? Will the central bank juice the economy with lower rates or not?

On this point, Powell didn't offer much insight other than they're planning to "wait and see" (again)...

I don't think we can say which way this will shake out. There's a great deal of uncertainty about, for example, where tariff policies are going to settle out and... what will be the implications for the economy, for growth, and for employment...

We are going to be watching the data. The data may move quickly or slowly. But we do think we are in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response.

In previous public appearances, Powell had said the Fed members would decide which part of their "dual mandate" to attack more – stable inflation or maximum employment. He said that would be determined by which goal is further from reach at the time.

To me, this means that if unemployment rises more than inflation, the central bank will cut rates to stimulate the economy. In the opposite scenario, rates would hold steady or even rise to bring down inflation.

Of course, this relies on the thought that the Fed is correct in its outlook, which it often isn't. Perhaps this is why Powell said that "we don't have to be in a hurry" to do anything. As he continued...

There are cases in which it would be appropriate for us to cut rates this year. There are cases in which it wouldn't. And we just don't know...

One thing that Powell said "doesn't affect" the decision? Trump calling for lower rates. (When a reporter asked Powell about the president saying he doesn't want to see him fired anymore, Powell declined to comment.)

All this said, the world keeps spinning... And the Fed may have other reasons to make a move, too.

A reason the Fed might want to cut rates: a 'frozen' housing market...

Any comparisons to the housing crisis and the financial crisis, circa 2008 and '09, can provide a warning signal for investors. And right now, we're seeing unsold housing inventory hit the highest level since the crash.

Just take a look at this chart Charles Schwab Chief Investment Strategist Liz Ann Sonders shared on X...

As of March, 119,000 unsold homes were on the market. That's the highest level since 2009, and it's nearly quadruple the recent low of 31,000 from the COVID-19 housing boom.

This is all thanks to interest rates...

When unsold inventory was cut in half in 2020 and 2021, the average 30-year fixed mortgage rate was below 4% for a long section of that time frame... and even dipped below 3%. These days, it's nearly 7%.

As our colleague Brett Eversole explained in a DailyWealth essay in March...

Higher rates mean lower housing affordability. And when fewer folks can afford to buy, fewer homes sell.

Higher rates have pushed buyers out of the market. As Brett continued...

This exodus is showing up now in pending home sales. This measure tracks the number of homes that are under contract but haven't yet sold. It isn't a complete look at the market. But it does give an early indication of future home-sales data.

Pending home sales recently hit the lowest level since the data begins. Take a look...

After a crash in 2022, this measure has been stuck at historically low levels. It has hit several new all-time lows in recent years... But the January reading was a major drop from the month before – and another new low.

But this won't last forever. Housing inventory is highly cyclical. At some point, buyers will rush in and take this unsold inventory off the market. The question is when. And Brett is watching one metric for the likely answer. As he wrote...

Mortgage rates are the key to unlocking the next housing-activity boom. If rates fall below 6%, we should see buying pick up. So if you're worried about housing, that's what we want to watch in the months ahead.

Mortgage rates also tend to take their cues from Fed policy, often moving in the same direction.

This doesn't always happen. In the fall, for example, when the central bank cut rates, longer-term bond yields and mortgage rates moved higher, not lower, as more inflation expectations were priced in. But the world is in a different place now with tariff concerns, ideas about a recession, and mixed messages showing up in inflation data.

Meanwhile, mortgage rates have remained stubbornly high...

This morning, the Mortgage Bankers Association ("MBA") released its housing market activity survey for the week ending May 2. On the surface, activity picked up. Applications for purchases rose 11% from the week prior.

But looking back further, applications to buy a home are down more than 35% from where they were at the same week in 2022.

And the average 30-year fixed mortgage rate hasn't budged much from late 2022 levels, either...

Last week, mortgage rates fell to 6.84%, from 6.89% the week prior. That's still well above Brett's key level of 6%. If and when mortgage rates come down, the housing market will be "unlocked."

But until then, buyers will wait on the sidelines. And that could lead to inventory getting even closer to those scary levels from the housing crisis.

They're already as close as they've ever been since then. It's one big sign of drag on a U.S. economy that's encountering plenty of other risks at the same time... And this is all one big reason the Fed could cut rates later this year.

New 52-week highs (as of 5/6/25): Alpha Architect 1-3 Month Box Fund (BOXX), CBOE Global Markets (CBOE), CME Group (CME), Dimensional International Small Cap Value Fund (DISV), Franklin FTSE Japan Fund (FLJP), Kinross Gold (KGC), Altria (MO), Republic Services (RSG), Sandstorm Gold (SAND), Skeena Resources (SKE), Travelers (TRV), Wheaton Precious Metals (WPM), and W.R. Berkley (WRB).

In today's mailbag, thoughts on yesterday's edition that previewed today's "Fed show"... more concern about the impact of tariffs... and a question on our discussion on oil prices... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"You should have called it the Fed Clown show is back. What a change of tone from Powell. When Biden was president and the rate of inflation was actually increasing Powell dismissed it as 'transitory.' Now Trump is president and the rate of inflation is not increasing (but might so in future), Powell is an inflation and rates hawk. Is Powell playing politics? You be the judge." – Subscriber S.J.I.

"Since the tariffs were announced, what is obvious is not being discussed: the average wage in the US is approximately $66,622. The strength of the economy relies on this group. This group is struggling with higher prices and are reducing their spending. Companies in turn, will cut hours and jobs. This sounds more like stagflation to me." – Subscriber Ted B.

"Good analysis of the global crude market, however it's what isn't said that concerns me. Hopefully somebody in the Trump administration is replenishing the Strategic Oil Reserve. Another botched Biden policy. With crude well below the $70/bbl. target, this will make us safer than another $150B in Pentagon spending." – Subscriber T.J.

Corey McLaughlin comment: As we wrote on Monday, the Strategic Petroleum Reserve is being refilled, albeit gradually. It's at around 399 million barrels at last count, as of the week of May 2. That's its highest level since October 2022, but still about 40% below capacity.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
May 7, 2025