Markets Rally as U.S. and China Hit Pause on Tariff War
U.S. and China hit the brakes on their escalating tariff war, announcing a 90-day suspension of recently imposed tariffs as they work toward a more permanent agreement. Effective immediately, U.S. tariffs on Chinese imports drop from 145% to 30%, while China slashes its tariffs from 125% to 10%, alongside also easing restrictions on rare-earth minerals. Markets celebrated the news, with the Nasdaq surging 7.2%, the S&P 500 climbing 5.3%, and the Dow gaining 3.5%. Tech stocks rallied this week, especially NVIDIA, which soared 16% on a new chip deal with the UAE. In a nod to smoother trade waters, the U.S. also announced plans to ease restrictions on AI chip exports, giving another boost to the tech sector.
Inflation cooled slightly in April, with the Consumer Price Index (CPI) rising just 2.3% year-over-year, its slowest pace since early 2021. Wholesale inflation also showed a surprising decline, with the Producer Price Index (PPI) dropping 0.5%, hinting that businesses may be absorbing some tariff costs. Muddying the inflation waters was Walmart’s announcement that it plans to hike prices, which may give cover to other businesses to follow suit. Retail sales edged up just 0.1% in April, below expectations, as consumers pulled back on big-ticket items like cars and apparel, likely due to uncertainty over trade policies. Meanwhile, consumer sentiment dipped (again) to its lowest since June 2022, reflecting ongoing jitters around tariffs and the economy despite the temporary truce.
Bond markets saw mixed action as U.S. Treasury yields fluctuated on the trade headlines, resulting in modest losses for Treasuries but gains for corporate and high-yield bonds. Oil prices jumped early in the week on easing recession fears but cooled off later as news emerged of a potential U.S.-Iran nuclear deal. Gold prices dipped 3.9% as investors flocked back to equities, while the crypto market held strong after last week's surge.
Moody’s cut the US government’s credit rating late on Friday , citing rising debt levels. Have they not been paying attention so far? Nothing we didn’t already know, but it might spook bond markets at the open. Sounds like Monday’s problem.
What This Means for Investors
The 90-day tariff suspension is a welcome breather, but it's just a pause, not a resolution. While markets may continue to rally on optimism, expect volatility to linger as negotiations unfold. Tariffs are still much higher than at the beginning of the year and the impact will not be negligible on the economy. It isn’t time to forget the lessons of 2025 and pile straight back into the Mag 7 2x leverage. Staying diversified globally with a focus on resilient sectors, high-quality bonds, and hedges can help weather the ups and downs ahead. If you weathered the storm, congratulations, but keep a cool head.
Market Activity
The stock market continued its upward climb on good news. The S&P 500 and Dow crossed into positive territory for the year. The NASDAQ is only a hair off. The US downgrade may take some wind out of the market’s sails next week though.
Bond yields are still elevated and may push higher after the downgrade as well. The 20-year and 30-year are flirting with 5% levels which has been a resistance level over the past year. Pushing through that will be a wake up call.
Stocks
Fixed Income
Economic Reports
The Consumer Price Index (CPI) for April was softer than expected, and displayed zero impact from the tariffs. Pre-tariff inventory and cooler retail sales seemed to contribute. The Producer Price Index (PPI) also soft (and negative). In another world, the Fed would already be cutting absent the tariffs. Jobless claims were steady and don’t show any cracks forming. The Fed is in a tough spot as calls for cuts are only getting louder.
Last Week
Next Week
Earnings Releases
Walmart stole the show this week by announcing upcoming price hikes. Per the CEO, “we can’t absorb it all”. Most companies have reported positive results for Q1 and the only big report left is NVIDIA on May 28th.
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Next Week
Recommendations
It was the best of times. It was the worst of times.
- Consumers Prop Up the Economy. They’re Showing Signs of Strain | The economy and labor markets are cooling, but recession risks are also falling. There are reasons to be concerned and this covers much of the data that is starting to show that the lower-income and less financial stable households are feeling the squeeze.
- Hard data suggests tariff-driven inflation and recession fears may be overblown | Let’s be clear: Nothing is clear. Or predictable yet.
- Market Minute: The bond market is not buying it | In light of the credit downgrade: The bond market is seeing through the tariff puffery and focused squarely on the large and growing debt pile. The tax plan looks like its lighting money on fire.
Some Risks are Clearer than Others
- A Good Time for the Sleeping Point Story | The market is up! But if you were stressed the last few weeks, its not time to forgive and forget. It’s time for action.
- Buy some bitcoin, lose a finger | “Torture with a power drill” might be the best advertisement for Bitcoin ETFs over self-custody.
- How flows change factor performance | Pretty technical (but interesting!) look at how additional flows impact the returns of different investment factors such as momentum and value.
With the new “business-friendly” FTC, who needs enemies?
- Inside Amazon's Plan to Stay on Top Forever | Josh Brown sits down with Dana Mattioli of The WSJ to discuss her new book "The Everything War". 21 min mark they discuss the on-going fight with regulators and the risks to the business.
- Throwback: Meet the New FTC—Same as the Old FTC | Federal Trade Commission Chair Andrew Ferguson reaffirms the flawed 2023 merger guidelines [2/21/25].
Chart(s) of the Week
Odds of a rate cut in the next few months is at an all time low. June is off the table. July is pretty unlikely. September is even getting close to a toss up. As trade tensions eased, recession risks are falling. Since the Fed is expecting inflation, they have fewer reasons to cut.
Q1 earnings were better than expected. And the stock prices reflected the rewards. EPS beats were rewarded more than average, and even misses were handled with grace. Amidst the chaos of the last six weeks, many companies were given the benefit of the doubt.
Bitcoin is getting (slightly) less volatile.
Related: Trade Talks, Fed Moves, and Market Shifts: The Real Action’s Coming to Geneva