Trading the Trade Talks
President Trump announced a trade deal last week with the UK, and the Administration has teased negotiations with other trading partners, too. Discussions between US and Chinese officials began over the weekend with US tariffs on Chinese exports coming down from 145% to 30% for the next 90 days as the two sides negotiate further, and Chinese tariffs on US exports dropping from 125% to 10%. In our view, current market pricing assumes that broad tariff rates — and specifically US-China tariffs — will be reduced in the coming months via successful negotiations. In the absence of material progress, we would expect markets to remain volatile as economic data is likely to start to deteriorate by the 3rd quarter.
3 Things to Know
With the Fed Worried about Stagflation, Policy Is to “Wait and See”
The FOMC held their first meeting this week following the April 2nd reciprocal tariff announcement.
But with no certainty around implementation and impact of any country or sectoral tariff rates, the meeting was understandably inconclusive. The Fed remains in a position where all it can realistically do is “wait and see and to watch” on when and how these tariffs will be felt in the US economy.
For now, key indicators such as unemployment and inflation indicate a slowing albeit still positive economy. But given very poor forward-looking sentiment surveys and that the actual logistical tariff impacts yet to be felt (or even paradoxically having helped to boost activity data in Q1 due to pull-forward demand), today’s backward-measuring economic data is likely to be very different than what can be expected later this year.
So, while the Fed will likely provide more dire economic forecasts in its upcoming June meeting that would argue for cutting rates soon, tariffs at any level are also likely to increase inflation at least initially, and the Fed is currently primarily focused on containing inflation even at the expense of a weaker economy.
On inflation, Chairman Powell said: “It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariffs effects, on how long it takes for them to pass fully into prices and ultimately on keeping longer-term inflation expectations well anchored.”
That’s it for Earnings Downgrades?
We’ve now heard from over 90% of the companies in the S&P 500 reporting their 1Q25 earnings results. It is mainly retailers left to report which will provide some clues on how consumers are holding up.
In all, analysts have lowered their full-year 2025 growth estimates from a high last September of 14.6% to 7.9% on a dimmer outlook for economic growth amid trade policy uncertainty. We believe this downgrade process has more room to run.
While tariffs have impacted soft economic data, like sentiment surveys, they haven’t really impacted the hard economic data. In addition, analysts have been slow to lower their 3Q25, 4Q25 and 2026 numbers as they did for 1Q25 and 2Q25. This lies ahead, in our view.
We entered the earnings season looking for company guidance, but the outlook remained too cloudy for most to provide it, and a 90-day pause on reciprocal tariffs made it logical for most management teams to roll back providing detailed color by one quarter.
We Are Watching FX Jitters Closely
President Trump wants a weaker dollar but the disorderly way in which USD has declined is concerning on two fronts: 1) capital flows dwarf trade flows and can move much faster if investors lose confidence in US policy settings, and 2) the USD’s selloff has been driven not just by private agents but state actors as well — notably, China but other emerging market (EM) central banks have followed.
This can potentially undermine dollar’s status as the world’s reserve currency.
For now though, tariff uncertainty may have peaked - foreign owners of ~USD 62trn in US assets who have partly unwound their long US asset positions more rapidly than tariffs can rebalance the US goods deficit, may have found a short-term equilibrium level.
This means that the period leading up to the end of the US administration’s 90-day tariff pause (to July 9th) could see a tactical “risk-on” bounce on any major trade deals announcements.
Beyond the 90-day pause however, further capital flow adjustments may once again weigh on USD but with US exceptionalism largely downgraded, markets may also need to weigh the impact of a global effective tariff rate of between 10-20% on the rest of the world.
This likely creates a more mixed longer-term picture for USD.
See our weekly CIO Strategy Bulletin for more details