Tariffs, Trade Tensions, and Powell’s Fed Remarks Weigh on Markets as Retail Sales Surge and Housing Starts Fall

Weekly Economic Review: April 18, 2025

Ongoing U.S. – China trade tensions and hawkish remarks by Fed Chair Powell led to further stock market declines, while the bond market stabilized. Pre-tariff buying drove retail sales to their highest level in over two years, while housing starts saw their largest decline in a year, driven by high prices and mortgage rates

The U.S. stock market experienced modest declines this week, primarily due to tariff uncertainty, an intensified trade war with China, and hawkish remarks from Fed Chair Powell rejecting a “Fed put” and reiterating the negative effects of tariffs on inflation and economic growth. The S&P 500 fell by 1.5% this week, bringing its year-to-date decline to 10.2%. Similarly, the Nasdaq dropped 2.6% this week and has decreased by 15.7% year-to-date.
As the trade war between China and the US escalates, the Trump administration has imposed new export restrictions on AI chips to China, including Nvidia’s H20 chips and AMD’s MI308 product, to limit China’s advancements in AI and military technology. Additionally, starting October 14, 2025, new port fees have been announced for Chinese-built and Chinese-operated ships docking at US ports, aiming to challenge China’s dominance in global shipping and boost domestic shipbuilding.
On the economic data front, this week began with retail sales posting a significant surge in March, marking the largest increase since January 2023. This growth was fueled by heightened consumer spending on motor vehicles, building materials, sporting goods, and electronics. It appears that consumers accelerated their purchases ahead of impending tariffs. The March uptick was widespread, with gains in 11 out of 13 categories. Notably, motor vehicle sales experienced the most substantial rise since January 2023, as consumers hurried to buy cars before the 25% tariffs on imported vehicles took effect on April 3.

In March, housing starts experienced their sharpest decline since March 2024, primarily due to a significant slowdown in single-family housing starts, which reached their lowest level since April 2020. This decline is attributed to high prices and mortgage rates. The cost of homes is expected to rise further as new tariffs increase the cost of building materials. Combined with sluggish economic growth, this is likely to dampen construction activity throughout the coming year. While building permits saw a slight increase, permits for single-family homes fell to their slowest pace in four months.

Let’s examine in more detail the retail sales and new residential construction announced last week.

Retail Sales:

According to the Commerce Department, retail sales increased by 1.4% month-over-month in March, following a 0.2% rise in February. The March figure met market expectations of a 1.4% increase. Annually, retail sales grew by 4.6% in March, compared to a 3.5% rise in February. Sales rose in 11 of the 13 categories tracked by the Commerce Department, with the largest gains in motor vehicles (5.3%), building materials (3.3%), sporting goods (2.4%), and food service and drinking places (1.8%). However, sales at gasoline stations and furniture stores declined in March.

Excluding autos and gasoline, retail sales increased by 0.8% in March, matching the growth seen in February. This figure exceeded market expectations of a 0.6% increase. On an annual basis, retail sales rose by 4.5% in March, following a 4.2% increase in February. Control-group sales, which exclude food services, auto dealers, building materials stores, and gasoline stations and are used to calculate GDP, rose by 0.4% in March. This was lower than the market expectation of 0.6% and the 1.3% increase seen in February. Annually, control-group sales increased by 4.6%.

New Residential Construction:

According to the US Census Bureau and the US Department of Housing and Urban Development, new home construction fell 11.4% to a 1.32 million annualized rate in March, which was lower than the market expectation of a decline of 5.4%. Single-family housing starts, which traditionally account for most homebuilding, declined 14.2% in March to 940,000 annualized units. In contrast, multi-family housing starts remained unchanged to 371,000 annualized units in March, above the 367,000-unit average from 1959 to 2024. Housing starts in the Northeast and the Midwest posted gains of 1.4% and 76.2%, respectively, while those in the South and the West decreased 17.1% and 30.9%, respectively. On an annual basis, housing starts rose 1.9% in March, the first annual gain following six consecutive months of decline. While single-family housing starts declined 9.7%, multi-family housing starts posted a gain of 47.8%.

Building permits, an indication of likely future construction, increased 1.6% to a 1.48 million annualized rate in March, which exceeded both the expected 0.6% decrease and the February decline of 1.0%. The Midwest was the only region with a monthly decrease (9.5%) in building permits. Permit activity generally mirrored the data for housing starts. Permits for future construction of single-family homes decreased 2.0% to 978,000 annualized units, while multi-family building permits increased 9.3% to 504,000 annualized units following three consecutive months of decline. On an annual basis, building permits declined 0.2%, marking 14 consecutive months of an annual decline.

On a concluding note,

Fed Chair Powell spoke at the Economic Club of Chicago last Wednesday. He indicated that the Fed would wait for greater clarity before making any policy adjustments and that tariffs would cause at least a temporary increase in inflation, which could also be more persistent. He stated that the stock and bond markets are functioning well and dismissed the idea of a Fed rate cut to support the markets. Powell emphasized that the Fed would continue to focus on combating inflation while maintaining maximum employment. He also noted that economic growth appears to be slowing, with a rush of imports to avoid tariffs likely to reduce GDP estimates. Additionally, he acknowledged that current data suggest the economic activity slowed in the first quarter compared to last year’s solid growth.

The government bond market stabilized this week after last week’s sell-off. While Treasury yields on the short-end of the curve remained unchanged, yields for maturities beyond two years saw moderate declines. The two, five, and ten-year Treasury yields ended at 3.81%, 3.95%, and 4.34%, respectively, decreasing by 15, 20, and 14 basis points compared to their levels a week ago.  A week ago, the market anticipated three definitive 0.25% rate cuts. Now, it projects a 50% chance of one 0.25% cut and a 100% chance of three 0.25% cuts in 2025, totaling 0.75%. The first 0.25% cut is expected at the June FOMC meeting with a 70% probability. However, the market foresees two 0.25% cuts (totaling 0.5%) by July, followed by a third cut in either September with a 65% chance or October with an 88% chance, and potentially a fourth cut in December with a 50/50 chance.

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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