A palpable sense of relief is washing over global markets after the US and China agreed to temporarily cut most tariffs on each other’s goods ahead of further trade negotiations. North American equity futures are setting up for a circa-3-percent rally at the open, Treasury yields are inching higher, and both global oil benchmarks are climbing. In currency markets, the dollar is trading near a one-month high against its major counterparts, and the safe-haven Swiss franc, Japanese yen, and euro are all slumping in relative terms.
Under an agreement reached in Geneva over the weekend, US tariffs on Chinese goods will fall to an average 30 percent from 145 percent and Chinese duties on US imports will fall to 10 percent from 125 percent for the next 90 days. Beijing also said it would “suspend or cancel” retaliatory non-tariff measures taken against the US. No evidence of concessions from either side was provided, but Treasury secretary Scott Bessent said “The consensus from both delegations this weekend is neither side wants a decoupling,” noting “We concluded that we have shared interest and we both have an interest in balanced trade, the US will continue to move toward that”. This de-escalation is bigger than markets had been expecting, and will raise hopes that the US and global economies could escape the worst consequences of the trade war.
Markets now expect just two rate cuts from the Federal Reserve by year end, down from three on Friday. Speaking after last week’s decision, chair Jerome Powell said “We think we’re in the right place to wait and see how things evolve. We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient,” noting that officials were deeply uncertain about where tariff policies will land. “Until we know more about how this is going to settle out, and the economic implications for employment and inflation,” he said, “I couldn’t confidently say I know what the appropriate path will be”.
Tariffs will remain far higher than they were in January. Our calculations, which ignore potential substitution effects related to the redirection of trading relationships, indicate that the weighted-average tariff rate on US imports will fall to 14.8 percent under the weekend’s agreement. This is down from around 28 percent last week, but still represents the biggest increase in at least a century, and amounts to the heaviest tax burden imposed on imports since the Second World War.
Questions are arising around whether this will achieve any meaningful reduction in trade imbalances. Data released by the Chinese customs agency on Friday showed total exports rising 8.1 percent relative to a year earlier in April, even as shipments to the US fell by 21 percent. This suggests that the same dynamic that played out during Trump’s first trade war – in which goods are rerouted through other (mostly southeast Asian) countries before landing on American shores – is again underway, and that importers around the world are struggling to substitute for the enormous cost and efficiency advantages that Chinese manufacturers offer.
The Canadian dollar continues to weaken against its major-currency peers as lagging uncertainty effects put downward pressure on interest rate expectations. Data released on Friday showed the economy adding just 7,400 jobs in April – with most of the net hiring coming in the public sector – even as the labour force expanded by 46,700 workers, helping drive the unemployment rate up to 6.9 percent. 33,000 manufacturing jobs were lost in Ontario alone as trade frictions hit export-sensitive sectors hard – and without federal election hiring, at least 30,000 jobs would have been subtracted nationally. Some of this weakness could reverse in coming months as major auto plants resume production, but swap-implied odds on a rate cut at the Bank of Canada’s June meeting are holding at around 60 percent, with a move fully priced in for July.
In the week ahead:
US inflation reports should be regarded as stale news. Although some import-sensitive categories might exhibit modest signs of price acceleration, economists think both tomorrow’s core and headline consumer price index measures will climb just 0.2 percent for the month, and Thursday’s producer price release is seen exhibiting similarly-mixed characteristics as rising Chinese import prices are offset by falling services-sector costs. The full impact of tariffs could take several months to arrive as inventories are drawn down and supply chains adapt – and may not arrive at all if negotiations are successful in further reducing average rates.
Thursday’s retail sales release might also have “Wile E. Coyote” characteristics to it. US consumer sentiment has turned astonishingly negative in recent months, but employment levels have held up, and wage gains are continuing to pad overall income flows – suggesting that the deeper factors driving shopping behaviour haven’t changed in a negative direction. The Redbook same-store retail sales index has trended higher in recent months.
