Financial markets are staging a modest relief rally after the Trump administration seemed to quietly grant a partial tariff carveout to smartphones and consumer electronics – helping ease fears of a sharp rise in US consumer prices. North American equity futures are setting up for an advance at the open, Treasury yields are incrementally lower, and the dollar is cruising toward a fifth day of losses.

Some of Asia’s biggest export categories will be excluded from the government’s new tariff regime, according to a notice posted late Friday night by US Customs and Border Protection, suggesting that the administration is growing increasingly wary of the inflation and financial market risks associated with its trade actions. Under the updated terms, no baseline or “reciprocal” tariffs will be payable on twenty product categories – including smartphones, some computers and laptops, flat-screen displays, internet routers, and chipmaking machines – from most countries, but Chinese shipments will remain subject to the 20-percent “fentanyl” duties that were implemented prior to April 2. If the exemptions remain in place, the average tax on imports might decline to roughly 25 percent* — down from last Wednesday’s 29 percent, but up from around 3 percent at the beginning of the year.

Relief may prove short-lived. In an interview with ABC News yesterday morning, Commerce Secretary Howard Lutnick said the exempted items “are included in the semiconductor tariffs, which are coming in probably a month or two… We need our medicines and we need semiconductors and our electronics to be built in America, and Trade Representative Jamieson Greer told CBS “It’s not that they won’t be subject to tariffs geared at reshoring, they’ll just be under a different regime. It’s shifting from one bucket of tariffs to a different bucket of tariffs”. When asked on Saturday about what had prompted the climbdown, President Trump said “I’ll give you that answer on Monday. We’ll be very specific on Monday… we’re taking in a lot of money, as a country, we’re taking in a lot of money,” and then in a Sunday post on his Truth Social platform said “There was no tariff ‘exception’ announced on Friday”.

In the holiday-shortened week ahead, a few important events will help distract traders amid the ongoing tariff drama:

Tariff front-running among US consumers may have boosted retail sales in March, with purchases of cars and other big-ticket items lifting Wednesday’s headline print – but consumer sentiment is now worse than during the 2008 financial crisis, and traders are unlikely to extrapolate the data forward. According to the University of Michigan’s survey, released on Friday, household confidence has fallen more than 30 percent since December, with expectations for business conditions, personal finances, incomes, inflation, and labour markets deteriorating across all segments of society. Year-ahead inflation expectations are at levels last seen in 1981, and the share of consumers expecting unemployment to rise in the year ahead has doubled from November to the worst levels since the global financial crisis. It is possible, but extremely unlikely that consumer spending can hold up against this backdrop.

Market conviction is low ahead of Wednesday’s Canadian decision. Underlying inflation pressures have strengthened slightly in recent months and there are signs of a modest uptick in price expectations as consumers brace for the impact of tariffs on imported goods. But the economy continues to grow well below potential, weak commodity prices are weighing on prospects for a new investment cycle, demand for exports is highly likely to fall in the months ahead, and the real estate market — a key driver of growth in recent decades — is falling prey to a sharp deterioration in business and household sentiment. Market-implied odds on a rate cut are holding below 30 percent, but we think risk management considerations make it closer to a coin toss. Tomorrow’s inflation numbers could cast the deciding vote, with a clear deceleration in price pressures likely to sway officials toward delivering a cut.

In contrast, European policymakers are widely expected to deliver a quarter-point cut on Thursday morning. With inflation, especially in the all-important services sector, already easing and US tariffs highly likely to take a toll on demand in the months ahead, the case for lower rates is clear and incontrovertible. The Bank is unlikely to deliver firm guidance on next steps, but a more forceful iteration of the downside risks facing the economy should help reinforce investor expectations for at least three more moves this year.

We’re monitoring cross-asset correlations closely after the dollar and Treasury bonds sold off simultaneously last week – a development that is rare during normal circumstances, but rarer still in a crisis. As reported on Friday, a number of factors could be at play in driving yields higher: margin call demands, a technical breakdown in popular hedge fund basis and swap spread trades, or a growing awareness of the long-term threat that ongoing tariff wars could pose to the dollar’s usage in global trade.

Some have suggested that Chinese authorities could be selling Treasuries in an effort to force the Trump administration into a reversal. This is admittedly possible – and market rumours could have similar effects even if China doesn’t make a move – but the country’s holdings have fallen to levels that don’t truly threaten the stability of US debt markets. After almost a decade of stasis with respect to reserve accumulation, China’s leverage over US government finances is far smaller than is often believed, even when adjusted for potentially-significant custodial holdings in offshore centres like Luxembourg and Belgium.

Instead, we suspect that markets are simply re-rating the US growth trajectory. As investors brace for an increasingly-toxic mix of rising prices and slowing activity, real rate differentials are tilting against the United States, pushing investors to diversify holdings on a global basis, and driving the dollar down on a tactical basis. We don’t expect this to last: if a significant shock hits the global economy, the dollar’s unparalleled safety, liquidity, and yield advantages will come back into vogue.

*For those keeping score at home, we have now updated our tariff estimates on at least 17 different occasions since January 20.