Uncle Sam’s Crash Diet: A Stealthy Economic Shift

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Table of Contents

• Our Week in the Market – Key moves in equities, bonds, commodities & forex

• Uncle Sam’s Crash Diet: A Stealthy Economic Shift – How deep government cuts (thanks, Elon) quietly hit GDP

• Tariff Tango: Geopolitics and Trade Drama – Trade war high jinks, from secret talks to public tiffs

• What to Look Forward To Next Week – Upcoming data, central bank moves, earnings & events to watch

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Our Week in the Market

• Equities: 

  -Stocks partied like it’s 2004 with a 9-day winning streak – the longest in 19 years– recouping losses from Trump’s early-April tariff.

  -The S&P 500 jumped ~2.9% for the week, the Dow +3%, and Nasdaq +3.4%, buoyed by upbeat earnings and hopes the trade war might simmer down. A blowout U.S. jobs report and whispers of trade talks lit a fire under risk.

• Bonds: 

  -The bond market got the memo too – maybe the economy isn’t tanking just yet. U.S. Treasury yields spiked higher as April’s payrolls beat put a dent in recession. (Cue bond traders furiously un-inverting their yield curve spreadsheets.)

  -Still, with growth data looking wobbly, rate-cut bets only eased– the Fed’s meeting next week now holds even more intrigue.

• Commodities: 

  -Oil prices perked up, logging a gain as traders dared to dream of revived demand if tariff tantrums cool.

  -Gold, on the other hand, lost its luster – the shiny metal fell ~2.6% this, (its second weekly loss in a row), as safe-haven demand eased on trade détente hopes and rising. (When gold only settles at ~$3,243 an ounce, you know fear is coming off the boil.)

Uncle Sam’s Crash Diet: A Stealthy Economic Shift

*While everyone was busy watching the tariff tweets and tech earnings, a major economic shift has been happening on the down-low: Uncle Sam went on a crash diet. In the first quarter, U.S. federal government spending plunged by 5.1% – a drop of epic proportions not seen in. The result? GDP outright shrank at a –0.3% annual rate, shocking economists who had expected modest.

*It turns out that when you let Elon Musk run the new Department of Government Efficiency (cheekily dubbed “DOGE”), he actually takes a flamethrower to budgets. Major agencies have been shuttered, hundreds of thousands of federal workers got the axe, and R&D funding was. (BUT we won’t know the true effects of this slashing for a bit)

-This “government on SlimFast” regime is a big reason the economy hit a speed bump. Businesses may have front-loaded imports ahead of Trump’s tariffs (bloating the trade deficit and denting GDP) cbsnews.com, but underneath that noise, the evaporation of federal spending is a real shift.

-Final private demand actually held up OK (+3% last quarter), so consumers and businesses still had some mojo. But with D.C. tightening its belt (and then some), a key pillar of support is suddenly missing. It’s an under-the-radar development with major implications: fewer government paychecks and contracts could mean weaker consumer spending and investment ahead, possibly amplifying any downturn.

-Wall Street, for now, is obsessing over the Fed and trade war du jour, but Main Street may start feeling the pinch from the Musk-ified mini government. As one economist warned, this front-loaded import binge and spending cut set the stage for a “demand cliff” in.

****In plain English: the economy’s buffer is thinner, and any future shocks could hit harder. Keep an eye on this stealth austerity experiment – it might be making the Fed’s job a lot more complicated (and we suspect Jerome Powell isn’t sending Elon a thank-you card).

Tariff Tango: Geopolitics and Trade Drama

Just when you thought the trade war couldn’t get more theatrical, this week delivered a full-on tariff tango.

Act I: President Trump started the week by nearly firing Fed Chair Jerome Powell via rumor, apparently miffed that interest rates weren’t falling at his.

—Markets recoiled on cue – nothing says “confidence” like a political attempt to yoink central bank independence. By mid-week, Trump backpedaled and insisted Powell’s job is safe (for now), and lo and behold, hints of a U.S.-China dialogue.

—Yes, after weeks of escalating tit-for-tat tariffs, there was a glimmer of a détente: China’s Commerce Ministry indicated it’s evaluating an offer from Washington to restart trade. It’s the first sign in a while that Beijing is willing to even consider coming back to the table.

—Apparently, the U.S. sent messages “through relevant parties” (secret diplomatic pen-pals, perhaps?) proposing negotiations, and China responded with a solid “maybe”. In geopolitics, that counts as dramatic progress.

Act II: As investors high-fived over the mere possibility of talks, we got a reminder that this dance is far from over.

—Trump’s 145% tariffs on most Chinese goods – lovingly dubbed the “Liberation Day” tariffs – are still in, and neither side wants to look weak.

—Beijing certainly isn’t groveling; they’re just pragmatically leaving the door slightly ajar. And Trump, never one for subtlety, proclaimed that China will have to cave eventually, while also hinting he might delay the next round of tariff escalation if talks go well.

—The market chose to see the glass half full, but seasoned observers know a bluff when they hear one.

Act III: Meanwhile, other global players are adjusting their steps in this trade waltz. The EU quietly offered to ramp up purchases of U.S. goods by €50 billion (from soybeans to LNG) to appease.

—Essentially, Brussels is waving a white flag made of corn and natural gas, saying “let’s make a deal.” The catch? They want those earlier U.S. tariffs (10% on European exports) gone in.

—So far, no takers – the U.S. isn’t exactly in a generous mood, but the EU’s gambit shows how desperate everyone is to avoid becoming the next trade war casualty.

—Even the UK – fresh out of the EU and typically strapped for good news – saw an unexpected upside: the tariff turmoil knocked sterling down earlier, boosting UK export competitiveness, and now British stocks have jumped ~10% in a. Go figure: the Brits found a silver lining in trade war clouds (helped by hopes the Bank of England will cut rates to juice the).

Through it all, the global supply chain is holding its breath. Manufacturers from Asia to America report they’re facing rising costs and scrambling to reroute supply.

—Some are even delaying orders, praying this tariff tango ends before the music stops for. For now, markets are betting that cooler heads (or at least self-preservation) will prevail – this week’s rally was a wager that the peak of trade escalation might be behind. But experienced dancers know: when partners don’t trust each other, one wrong move can land everyone on the floor.

—Keep your eyes on the next steps from Washington and Beijing – a slip-up or a handshake could swing the markets and global growth in a big way.

What to Look Forward To Next Week

• Fed Decision (Wed, May 7) – The Federal Reserve takes center stage with its latest interest rate decision (FOMC announcement). Powell & Co. are widely expected to hold rates steady – but with Q1 GDP flipping negative and Trump screaming for cuts, all ears will be on the tone of the statement and press. Will the Fed stick to its guns or hint at a summer cut? Markets will be hanging on every syllable.

• Bank of England Rate Cut? (Thu, May 8) – Across the pond, the BoE meets under unusual circumstances: Britain’s economy is weathering the tariff storm relatively well (sterling is strong and stocks are up), but global risks are. Traders overwhelmingly expect a 25 bps rate cut to 4.0% to provide some. Keep an eye on Governor Bailey’s commentary for how Brexit Britain plans to navigate a trade-war-fueled world.

• Central Bank Bonanza (May 7–8) – It’s not just the Fed and BoE: Brazil’s central bank is forecast to hike rates (yes, hike!) on Wednesday to combat stubborn, even as most others ease. Poland may go the opposite way with a possible rate cut as early as Wednesday amid cooling inflationreuters.comreuters.com. And on Thursday, Sweden’s Riksbank is poised to cut rates, which could add pressure on the ECB to keep its easing streak going in. It’s a packed week of “monetary improv” – expect some currency and bond market volatility as each economy charts its own course.

• Earnings Season Finale – A few heavy hitters are still set to report results. Walt Disney (DIS) reports Wednesday (May 7) before the bell, giving insight into consumer spending on streaming and theme parks in this wobbling. Earlier in the week, Ford (F) drives in with its Q1 earnings (Mon, May 5), a key read on auto demand amid trade tariffs on parts. Also on tap: Palantir (PLTR) (Mon), Advanced Micro Devices (AMD) (Tue), Marriott (MAR) (Wed), and Occidental Petroleum (OXY) (Wed/Thu) among. These reports will cap off earnings season – any big surprises here could sway sector outlooks (and give us more fodder for next week’s snark).

• Trade & Inflation Data – Keep your popcorn ready for China’s April trade data (Fri, May 9) – the first real look at how Trump’s 145% tariffs impacted Chinese exports and. If there’s a dramatic collapse (or surge from front-loading), markets will react and it could either pressure negotiators or push them closer to a deal. China also releases inflation (CPI) figures on Saturday, May 10, and Beijing will be praying those don’t show a deflationary chill settling. Back in the US, it’s a lighter data week, but we’ll get the ISM services index and weekly jobless claims – incremental clues on economic momentum as we head toward summer.

• Geopolitical Wildcards: A trio of elections this weekend could have market ripples next week. Australia’s general election (Sat, May 3) is a tight race, and both sides promised big spending – the result could sway Aussie bond yields and the AAA credit rating. Singapore’s election will test its new leader’s, and Romania’s presidential vote (re-run) might usher in an anti-EU firebrand leading. If George Simion wins in Romania, expect some heartburn in EU markets given concerns about Romania’s debt and investment-grade.