By Mike Dolan
LONDON (Reuters) – What matters in U.S. and global markets today
By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets
With the dramatic re-set of U.S.-China tariffs on Monday, the market completed the hair-raising round-trip it has been on over the past six weeks of trade angst. Punch-drunk investors are now assessing whether anything in the real economy broke in the process.
In today’s column, I explore whether the sudden easing of China tariffs may actually be related to an economic theory that has long been prized by American conservatives: the Laffer Curve.
Now onto all of today’s market news.
Today’s Market Minute
* A White House executive order said on Monday that the U.S. would cut the “de minimis” tariff on China shipments to 54% from 120%, with a flat fee of $100 to remain starting from May 14.
* U.S. President Donald Trump arrived in Saudi Arabia on Tuesday to start a four-day swing through the Gulf region, focusing more on economic deals than security crises ranging from war in Gaza to the threat of escalation over Iran’s nuclear program.
* Apple’s success rests on the iPhone, which helped turn the company from a niche player in the personal computer industry into one of the world’s largest companies. Much of that was due to its supply chain in China. Now geopolitical tensions and trade wars are calling that dependence into question.
* The move by the United States and China to reduce import tariffs on each other and negotiate has been broadly welcomed by markets, but the de-escalation will do very little to restore the trade in energy commodities. Check out why in the latest piece from Reuters’ columnist Clyde Russell.
* A split is emerging between the Federal Reserve and other major central banks as they try to assess the economic impact of the rapidly shifting trade war. The Fed’s cautious stance runs the risk of leaving Chair Jerome Powell and his team behind the curve once again. Read the latest from Reuters’ columnist Jamie McGeever.
Re-set, surge and hold
The S&P 500, Nasdaq and Dow Jones indexes all boasted gains of 3-5% on Monday, their biggest single-day percentage gains since April 9. The S&P is now back within 1% of where it started the year, breaking above its 200-day moving average for the first time since late March.
Stock futures dialed back a touch on Tuesday, but retained most of their recent gains.
Following the positive China trade news, the dollar hit its highest point in a month before falling back a bit today. China’s offshore yuan outpaced it to briefly notch its best levels since November’s U.S. election.
After Monday’s agreement between the two biggest economies, the White House followed up with an executive order saying America would also cut the “de minimis” tariff on China shipments to 54% from 120%.
In the meantime, U.S. Treasury yields are back near mid-April levels as Federal Reserve rate expectations have been pegged back to just two cuts this year.
Back to square one? Well, not quite.
U.S. tariffs have come off the mountain top, and the investor relief is palpable. Goldman Sachs cut back its U.S. recession chances to 35% from 45%. They are the first major brokerage to do so.
BlackRock CEO Larry Fink says tens of trillions of dollars of financial firepower is sitting idle in cash amid trade war worries and uncertainty over the U.S. economy, where deficits are beginning to spook investors.
And the April 2 moves are still only paused for three months, with negotiations ongoing. The overall effective U.S. tariff rate at this point is still almost five times what it was at the start of the year, even if it has almost halved from last week.
Indeed, the effective tariff rate is currently around 13% according to the Fitch credit rating firm, so it’s still the highest since World War Two.
While everyone waits and watches, economic stress tests are unfolding, with April’s consumer price report due on Tuesday and retail and industrial numbers for the month out later in the week.
Headline annual inflation is expected to have remained steady at 2.4% last month.
However, there was a deep intake of breath before the report, following news that U.S. new-vehicle prices surged in April, a sign that Trump’s auto-tariff measures at least are already rippling through the car market. The average price consumers paid, after discounts and promotions, rose 2.5% from March, more than double the typical 1.1% increase over those two months in recent years, Cox Automotive’s Kelley Blue Book showed.
And there were further signs of trepidation among households and companies ahead of the tariff sweep.
Top U.S. bank lending officers reported weaker demand from businesses and consumers for many types of credit during the first three months of the year, according to a Federal Reserve report released on Monday, reversing a short-lived surge in loan demand the previous quarter.
Elsewhere, stocks around the world remained buoyant on the tariff detente – nudging higher on most bourses in Asia and Europe. Positive British wage data and German ZEW investor sentiment readings helped.
Make sure to check out my column today, where I look a little deeper at the effectiveness of the tariff hikes, why they were pulled back from the brink and why budget and government revenue considerations may now be top of mind.
Chart of the day
U.S. consumer price inflation for April is due for release on Tuesday, as households may be starting to experience the impact of the April 2 import tariff hikes. Due to a variety of lags related to existing contract expirations and producers absorbing some of the hit, economists think today’s report will paint an incomplete picture. It could be several months before the full impact is revealed.
As per Monday’s U.S.-China re-set, the tariff target is changing all the time. What is clearer is the wide gap between inflation trends in the U.S. and China since the pandemic, with Beijing reporting this week that CPI inflation in April is still in negative territory. That speaks both to the difference in domestic demand in both countries and also relative competitiveness.
Today’s events to watch
* U.S. April consumer price report (8:30EDT)
* New York Federal Reserve issues Q1 Household Debt and Credit Report (10:00EDT)
* Bank of England Governor Andrew Bailey and Chief Economist Huw Pill speak
* European Union finance ministers meet in Brussels, with European Central Bank Vice President Luis de Guindos
* U.S. President Donald Trump visits Middle East on three-country tour to Saudi Arabia, Qatar and United Arab Emirates (to May 16)
* NATO Secretary General Mark Rutte travels to Ankara ahead of informal meeting of NATO Ministers in Antalya on May 14-15
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan; Editing by Nia Williams)
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