- The US and China finally signed a deal to slash tariffs for the next 90 days.
- Trump signed a deal with the UK, leaving a baseline tariff of 10%.
- Economists expect US inflation to increase by 0.3%.
Equities soared on Monday after the US and China agreed to slash tariffs for the next 90 days. The move boosted risk appetite and put a pause to the trade war between the two countries. However, the future remains uncertain, meaning the rally might not last. At the same time, market participants are looking forward to US inflation figures for clues on future Fed policy moves.
After a trade war that lasted over a month, the US and China finally signed a deal to slash tariffs for the next 90 days. China agreed to cut tariffs on US goods to 10%. Meanwhile, the US cut tariffs on Chinese goods to 30%. From here, the two can negotiate even better trade terms. However, the future remains uncertain.
Nasdaq-100 index (Source: Bloomberg)
Still, Monday’s announcement revived risk appetite, sending equities like the Nasdaq surging. The Nasdaq is about to enter a bull market. Moreover, the pause in the trade war eased worries of a US and global recession. Investors regained confidence in the US economy and its assets.
The China-US trade deal followed talks between the US and the UK last week. Trump signed a deal with the UK, leaving a baseline tariff of 10% on all its imports. Trade tensions have been easing in recent days, with market participants expecting more trade deals.
As a result, Fed rate cut expectations have dropped sharply. Initially, traders expected around 100-bps of cuts this year, given the poor outlook for the US economy. However, by Monday, that figure had dropped to 56-bps. Nevertheless, policymakers will keep an eye on incoming data to gauge the current state of the economy. At last week’s policy meeting, Powell said there was still no clarity about the direction of the economy.
If there is no threat to growth, the Fed will likely shift its focus to inflation, which has resumed its decline. The US CPI reports on Tuesday will show whether this downtrend is still in place. Economists expect inflation to increase by 0.3% after a 0.1% decline in the previous month.
Meanwhile, the annual figure might hold steady at 2.4%. Softer-than-expected numbers will boost rate cut expectations. On the other hand, an upbeat report will lower expectations for rate cuts. Equities do better when interest rates are low.
