Flash PMI Data Shows Prices Jumped in May. No Surprise There
Nike’s upping prices and we expect others to follow in its footsteps, pushing out rate cut timing.
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We are seeing some potential progress on the trade deal front between the U.S. and the European Union, but at the same time, we are also seeing some fresh questions over trade progress between the U.S. and China. The European Union's offer includes phased tariff cuts on non-sensitive goods, plus cooperation in energy, AI, and digital infrastructure. We’ll see what comes of this, but we also note the EU is readying some $108 billion in retaliatory tariffs if talks fail.
We hope calmer heads prevail, especially since the would-be progress we saw recently between the U.S. and China could be stagnating. In response to a U.S. Commerce Department warning that using Huawei chips anywhere in the world would violate U.S. export controls, China’s Commerce Ministry today said it would take legal action against any organization or individual assisting the U.S. in discouraging the use of China’s advanced semiconductors. We recognize this is a hot topic and one that has the potential to drive headlines and market anxiety in the near term. It also supports our view that a trade deal between the U.S. and China could take a while.
Flash May PMI Shows Price Pressures Building
In addition to showing a pick up in manufacturing and service sector activity during May, S&P Global’s Flash May PMI report found average prices charged for goods and services jumped higher in May, rising at a rate not witnessed since August 2022. The report noted an especially steep rise was seen for manufacturers’ selling prices, which posted the largest monthly increase since September 2022. As you can probably guess, the rise in output prices was tied overwhelmingly to tariffs, having directly driven up the cost of imported inputs or caused suppliers to pass through tariff-related cost increases. That also explains the drop in export orders cited by S&P for May, but it suggests we are likely to hear more companies announce price hikes.
The latest was Nike NKE, which is expected to raise prices later this week on a wide array of goods. Reports suggest prices for Nike apparel and equipment for adults will increase between $2-$10, footwear priced between $100-$150 will see a hike of $5, while sneakers priced above $150 will see a $10 increase. While Nike did not call out tariffs as the reason for these hikes, Nike does manufacture about half of its footwear in China and Vietnam. If you’re thinking, "Nike won’t be the last to make such announcements," we’re inclined to agree with you.
What We’ll Continue to Focus On
The longer it takes for trade deals and their details to emerge, the longer the margin and bottom-line headwinds companies face will blow, or the more likely we’ll see companies follow in Nike’s and before too long Walmart’s WMT footsteps. That is likely to drive Consumer Price Index figures higher and that supports over view the market’s call for three rate cuts this year is looking less and less likely.
We’ll continue to mine upcoming earnings calls and investor conference presentations for the latest company comments on tariffs and margin pressures. Our focus will remain on second half of 2025 earnings per share expectations and what that could mean for the market’s multiple, but we’ll also need to consider final details of a passed Trump tax and budget deal as well as those for any eventual trade deals.
