This Week in Review | US-China Tariffs, US Inflation, US Drug Cost Executive Order (May 16, 2025)

Transcript

Makenzie Winner:

Hello, and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they mean for markets, and most importantly, the potential impact for investors. Now, let's review what happened this week.

First, US-China trade negotiations.

On Sunday, the US and China agreed to take a 90-day pause on higher tariffs. During this 90-day period, the US agreed to lower their baseline tariff to 30%, with China agreeing to a 10% tariff, but neither country took higher tariffs off the table. We think tariffs are poor economic policy. They make trade more difficult and tend to impact the imposing country more than those subject to the tariffs. But elsewhere, their effects are generally milder and can even spur positive developments. America's tariffs don't stop the rest of the world from trading freely. In fact, they appear to be encouraging free trade elsewhere. Countries worldwide have been actively negotiating new trade deals this year, and while we don't expect these potential agreements to immediately boost commerce, they can certainly benefit the global economy and markets in years to come. Today, trade fundamentals appear more favorable outside the US, likely contributing to non-US stocks outperformance so far in 2025. As for the US, while uncertainty remains, early data suggests businesses have the means and motives to adapt, even if the recent US-China trade agreement falters.

Next, US inflation.

The latest US inflation data was released this week. US April headline CPI slowed to 2.3% year-over-year, below expectations. Core CPI, which excludes volatile food and energy components, stayed steady at 2.8% year-over-year, meeting forecasts. Month-over-month, both headline and core inflation accelerated 0.2%, and overall, recent inflation figures remained well below their long-term average of 3.2% year-over-year. Meanwhile, the University of Michigan's April consumer sentiment survey showed respondents expected prices over the next 12 months to rise at their fastest pace in 44 years. These inflation expectations are higher than in summer 2022, when supply chain disruptions were rampant and actual inflation was far higher and peaking. While some worry elevated consumer inflation expectations could become a self-fulfilling prophecy, we view sentiment surveys as a snapshot of current feelings and not a reliable predictor of what will happen next. Remember, inflation is always and everywhere a monetary phenomenon. Too much money chasing too few goods and services, leading to price increases economy wide. Without a significant surge in the money supply, we think a dramatic increase in inflation is unlikely. While consumers might expect higher inflation ahead, bond market metrics like the five-year break-even rate tell a different story, suggesting markets don't anticipate a significant prolonged inflation problem. To us, bond yields grounded in actual financial actions offer a clearer picture than sentiment driven surveys, and we believe these indicators, along with benign money supply growth, point likely to milder inflation than consumer expectations currently suggest.

Finally, US drug costs and an executive order.

This week, President Trump announced on social media that he would be signing an executive order aimed at cutting prescription drug prices. His initial announcement included a most favored nations policy, whereby the United States will pay the same price as the nation that pays the lowest price anywhere in the world. Now, Trump signed the order on Monday, which does ask drugmakers to voluntarily lower prices for some medicines. But the more ambitious parts of the plan, like the most favored nations policy, aren't included for now, relieving some pharma firms. For investors, there are a couple of things to keep in mind as drugmakers prepare to negotiate. Price controls are generally economic negatives that tend to hurt supply and ultimately lead to higher prices. But the specifics here matter, and right now, there's still a lot we don't know. Additionally, US courts shot down a similar Trump policy proposal back in 2020, so this latest version isn't a done deal yet. Now, expect some uncertainty to persist, as we don't know what negotiations between the drugmakers and the government will yield a headwind for the pharma industry. Importantly, if the outcome ends up being less impactful than feared, the relief could boost markets.

That's it for this week.

 Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again for joining us, and don't forget to hit "like' and "subscribe!"