Tariff Impacts Compounded by Geopolitical Risks: Global Economy Faces Multiple Challenges

US Tariffs Weigh Down Japan’s Trade Outlook

Auto Sector at the Heart of Tariff-Driven Decline

Macroeconomic Vulnerabilities Deepen

BOJ’s Policy Constraints Grow Tighter

Trade Diplomacy and Domestic Stakes

Source: Reuters

U.S. retail sales dropped more than expected in May, weighed down by a decline in motor vehicle purchases as a rush to beat potential tariff-related price hikes ebbed, but consumer spending remains supported by solid wage growth for now.

The largest decline in sales in four months reported by the Commerce Department on Tuesday added to moderate job growth last month in suggesting that domestic demand was softening. That was reinforced by other data showing production at factories, outside motor vehicle assembly, decreased in May.President Donald Trump's aggressive and often shifting tariff position has heightened economic uncertainty, making it difficult for businesses to plan ahead. Federal Reserve officials meeting on Tuesday and Wednesday are expected to leave the U.S. central bank's benchmark overnight interest rate unchanged in the 4.25%-4.50% range while monitoring the fallout from the import duties and rising tensions in the Middle East.

"Tariff announcements have had a clear impact on the timing of large-ticket purchases, notably autos, but there are few signs yet that tariffs are leading to a general pullback in consumer spending," said Michael Pearce, deputy chief economist at Oxford Economics. "We expect a more marked slowdown to take hold in the second half of the year, as tariffs begin to weigh on real disposable incomes."Retail sales fell 0.9% last month, the largest decrease since January, after a downwardly revised 0.1% dip in April, the Commerce Department's Census Bureau said. The second straight monthly decline unwound the bulk of the tariff-driven surge in March.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, decreasing 0.7% after a previously reported 0.1% gain in April.

They increased 3.3% year-on-year in May.

Sales last month were also held down by lower receipts at service stations because of cheaper gasoline as the White House's protectionist trade policy has raised fears over global growth, restraining oil prices. But hostilities between Israel and Iran have boosted oil prices. A 25% duty on imported motor vehicles and trucks came into effect in April. Unseasonably cooler weather likely also hurt sales.Receipts at auto and parts dealerships tumbled 3.5%. Sales at building material and garden equipment and supplies dealers dropped 2.7%. Receipts at service stations fell 2.0%, while those at electronics and appliance stores slipped 0.6%.

Sales at food services and drinking places, the only services component in the report, declined 0.9%. Economists view dining out as a key indicator of household finances.

But online sales jumped 0.9%, while those at clothing retailers increased 0.8%. Furniture store sales soared 1.2%. Sporting goods, hobby, musical instrument and book store sales advanced 1.3%.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4% in May after an upwardly revised 0.1% fall in April.

These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have dropped 0.2% in April.People shop for groceries at Eastern Market in Washington

A man shops for meat at Eastern Market in Washington, U.S., August 14, 2024. REUTERS/Kaylee Greenlee Beal/File Photo Purchase Licensing Rights, opens new tab

DOWNSIDE RISKS MOUNTING

Economists estimated that growth in consumer spending, which accounts for more than two-thirds of economic activity, was so far this quarter tracking at least a 2.0% annualized rate after slowing to a 1.2% pace in the first quarter.

The Atlanta Fed is forecasting GDP rebounding at a 3.5% annualized rate in the second quarter. The anticipated surge will largely reflect a reversal in imports, which have fallen sharply as the frontloading of goods fizzled. The economy contracted at a 0.2% pace in the January-March quarter.

Downside risks to consumer spending are, however, rising. The labor market is slowing, student loan repayments have resumed for millions of Americans and household wealth has been eroded amid tariff-induced stock market volatility. Economic uncertainty could lead to precautionary saving.

"The outlook for consumer spending is cloudy," said Bill Adams, chief economist at Comerica Bank.

Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

Economists said retailers likely offered discounts last month, adding that could explain part of the benign consumer price data in May. They, however, expected price pressures to build up in the month ahead.

That thesis was supported by a separate report from the Labor Department's Bureau of Labor Statistics showing import prices, excluding fuels and food, increased 0.4% in May after advancing 0.5% in April. In the 12 months through May, the so-called core import prices increased 1.3%.

Core import prices are being driven by dollar weakness, with the greenback down about 6.2% this year on a trade-weighted basis. Trump's aggressive trade posture has shaken investors' confidence in the dollar, eroding the appeal of U.S. assets.

"This is another sign that inflation will pick up this summer and into the fall as prices start to reflect the higher costs for goods from enacted tariffs," said Ben Ayers, senior economist at Nationwide.

A third report from the Fed showed manufacturing output edged up 0.1% in May, lifted by a 4.9% jump in motor vehicle and 1.1% rise in aerospace and miscellaneous transportation equipment production. That followed a 0.5% decline in April.

But excluding motor vehicles, factory output fell 0.3% amid declines in fabricated metal products, machinery and nonmetallic mineral products. There was also a steep decrease in energy nondurable consumer goods production.

Manufacturing, which accounts for 10.2% of the economy, relies heavily on imported raw materials.

Trump has defended the duties as necessary to revive a long-declining U.S. industrial base, but economists say that cannot be accomplished in a short period of time, citing high production and labor costs as among the challenges.

"Continued uncertainty around where trade policy will ultimately land is preventing many businesses from taking on new capital expenditures, unsure of the policy and underlying demand environment," said Shannon Grein, an economist at Wells Fargo. "We expect manufacturing to continue to tread water in the months ahead."

Source: Kitco

Federal Reserve officials are widely expected to leave interest rates unchanged for a fourth straight meeting on Wednesday, reiterating they want more clarity on the economic impact of a wide array of government policy changes before adjusting borrowing costs.

Policymakers have warned President Donald Trump’s tariffs could boost inflation and unemployment, but so far, steady hiring and cooling inflation have allowed Fed officials to keep rates unchanged this year.

“The wait-and-see approach has served them well up until this point,” said Brett Ryan, senior US economist at Deutsche Bank AG. “Why deviate from it now when there’s no pressing reason to do so and with still upside risk to the inflation outlook?”

With so much uncertainty around the outlook, investors and economists will pay close attention to policymakers’ updated economic and rate projections. Officials may continue to pencil in two rate cuts this year — as many forecasters expect — but some economists say the so-called dot plot could show just one.

The Fed’s rate decision will be released at 2 p.m. Wednesday in Washington. Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.

Officials are expected to hold their benchmark interest rate in a range of 4.25%-4.5% and make few changes to the statement they released following their May 6-7 meeting. Policymakers may tweak a line referencing the uncertain economic outlook given trade tensions — particularly with China — have subsided since the May gathering.

Instead of saying uncertainty has “increased further,” officials may simply say it “remains elevated,” Ryan and his colleagues wrote in a note to clients.

The key document to watch will be the Summary of Economic Projections. That’ll contain the first update to Fed officials’ estimates for growth, inflation, unemployment and interest rates since March — before Trump announced widespread tariffs.

Those levies, which were larger than many economists and Fed officials had expected, initially weighed significantly on the US growth outlook. But now that many of those tariffs are paused and being negotiated, economists have pared back their most dire predictions.

Some 26% of economists in an April Bloomberg survey had forecast a recession in the next 12 months. That dropped to 10% in this month’s survey.

Even so, forecasters expect policymakers to once again mark down their estimates for growth this year and boost their 2025 inflation projections.

Officials’ median estimate of the longer-run fed funds rate, a proxy for the so-called neutral rate that neither weighs on nor boosts economic activity, may continue to edge higher. Another increase would further bolster the case for slightly fewer rate cuts in the future.

The surprise cooling of inflation recently — the Fed’s preferred measure was at 2.1% in the year through April, just above the central bank’s 2% target — opens the door to questions for Powell over why the Fed isn’t yet lowering rates.

While welcome news, Powell is likely to point to the risk that prices could still pick up, especially if higher tariffs take effect later this summer as scheduled.

Investors anticipate the next rate cut won’t come until at least September, with another one potentially following in December. Powell will likely try to avoid saying anything too definitive about this year’s rate path.

The Fed chief could also field questions about his meeting with Trump in May. Trump has repeatedly called on the Fed and Powell to lower rates. Earlier this month, the president implored the central bank to reduce rates by a full percentage point. He’s also noted lower borrowing costs would help ease the US debt burden.

Market participants will be on the lookout for anything Powell says on the Fed’s ability to pay interest on reserves held at the central bank, an authority granted by Congress in 2006 and implemented in 2008. Senator Ted Cruz of Texas has proposed eliminating that power. Known as IORB, the tool is crucial to the Fed’s ability to control short-term interest rates when it operates with a sizable balance sheet.

Source: Bloomberg Europe

Key Points:

U.S. Senate passed the GENIUS Act on June 18 with 68 votes in favor and 30 against, sending it to the House of Representatives for further deliberation. The legislation introduces the first comprehensive regulatory framework for stablecoins in the United States. The move is expected to enhance consumer protection and financial innovation while raising ethical concerns about conflicts of interest.

The U.S. Senate's approval of the GENIUS Act signifies a significant step towards regulating stablecoins. With 68 votes in favor, the bipartisan decision demonstrates a keen interest in setting federal standards in the crypto sector. Senators Tim Scott and Kirsten Gillibrand were instrumental in advancing the legislation which aims to enforce one-to-one reserves and anti-money laundering mechanisms.

Stablecoin Regulation Advances with GENIUS Act Approval

Concerns about potential misuse of power have been highlighted by Democrats, especially given the financial involvement of the Trump family in the crypto market. While the bill fosters safer stablecoin markets, the lack of restrictions on presidential families' profits has sparked controversy. Over $57 million in profits were made by the Trump family's World Liberty Financial project last year.

Market observes a mixed reaction with experts noting the regulatory clarity as a positive development for stablecoin adoption. Elizabeth Warren, among others, voiced concerns over the absence of anti-corruption measures, underscoring possible conflicts of interest this legislation could engender. Her stance reflects an ongoing tension between innovation and ethical governance within the legislative process.

GENIUS Act Sets Stage for U.S. Market Stability

Did you know? The GENIUS Act represents the U.S.'s first stablecoin regulation effort since previous bills like the STABLE Act, marking increased bipartisan support in digital finance legislation.

According to CoinMarketCap, USD Coin (USDC) remains steady at $1.00 with a market cap of $61.56 billion. The circulating supply totals approximately 61.56 billion USDC, maintaining its prominence in the stablecoin sector. Recent trading volume stands at $12.30 billion, marking a 6.39% increase over the last 24 hours, indicating sustained market confidence.

USDC(USDC), daily chart, screenshot on CoinMarketCap at 23:13 UTC on June 17, 2025.

The Coincu research team indicates that the GENIUS Act might bolster U.S. market stability, drawing increased institutional interest. With regulatory uncertainty reduced, further investment in U.S.-backed stablecoin projects is likely, aligning with historical trends of increased legal clarity leading to innovation.

Source: CryptoSlate