US-China Agree to Lower Tariffs for 90 Days

• Weekend talks between the US and China produced a lowering of tariffs between the two countries for 90-days and that has sparked a robust risk-on rally to open the week (Dow futures up over 1000 points). Much like the US-UK “deal” was more a framework to quide negotiations, this new deal is also short on specifics, but the market is receptive to any news that speaks of lowered tariff rates as this one does. Of course, this comes as we await a plethora of April inflation numbers starting with CPI tomorrow. It could be another volatile week so strap in! As you might expect, the risk-on mood has Treasuries on the back foot. Currently, the 10yr is yielding 4.47%, up 9bps on the day, while the 2yr is yielding 4.00%, up 12bps on the day.

 

• Determined to show the weekend gathering of US and Chinese trade officials in Geneva, Switzerland was more than a meet-and-greet photo op, the two sides agreed to lower tariffs immediately for 90 days to allow further negotiations. The US lowered tariffs from 145% to 30% while China lowered tariffs to 10%.  A joint statement was published overnight, suggesting the two countries have agreed to 1) cancelling escalatory tariffs of ~91% since ‘liberation day’ on April 2nd, and 2) suspending 24% of the reciprocal tariff on China for 90 days while keeping the ‘base rate’ of 10% in place for now. Together with the exemption of consumer electronics, this leaves an effective tariff rate on China of 38.6%. China, meanwhile, will lower their reciprocal tariffs to 10% for the next 90 days.

 

• While tariff news has been at the top of the financial news cycle for a few months, this happens to also be Inflation Week, with three separate reports on April price pressure. In 2024 this was perhaps the most anticipated and feared week of the month. Instead, this week it may just be declared co-star with the tariff news.

 

• First out of the blocks will be tomorrow’s April CPI read. Expectations are that overall inflation rose 0.3% for the month vs -0.1% in March, keeping the YoY rate unchanged at 2.4%. Meanwhile, core CPI is also expected to increase 0.3% MoM vs. 0.1% the prior month, keeping the YoY rate unchanged at 2.8%. With the much hotter first quarter numbers from 2024 now out of the YoY calculations, achieving further improvement in the YoY rate towards the Fed’s 2.0% goal will be exceedingly difficult, especially as tariff impacts, despite the rollback in rates, are likely to limit monthly improvement. That’s part of the reason in their March forecast, the Fed saw little if any improvement in inflation towards the 2% target this year. That’s probably still a good bet.

 

• Keep in mind too, the April CPI surveys are done by mid-month so for April that was still early days in the tariff talks and likely not reflective of the full impact of the increased tariff rates announced on April 2, “Liberation Day”.  Of course, with the latest tariff news reducing some of the more draconian tariff rates the issue will continue to cloud pricing reports for much of 2025 it appears.

 

• The CPI report will be followed on Thursday by a look at wholesale pricing pressure with April PPI. Recall, part of the big drop in retail-level inflation (read: CPI) in 2022 and 2023 was aided by deflation in wholesale prices that was partially passed onto lower retail prices. Wholesale prices are no longer falling and, in fact, have been climbing for several months (see graph below). That will also work to keep CPI from falling to that 2% Fed target.

 

• Retail Sales for April, also on Thursday, will break the string of inflation reports with a look at consumer consumption in April, especially in the goods area. Retail sales ex-autos are expected to increase 0.3% MoM after a 0.6% increase in March. The so-called Control Group category which feeds directly into GDP rose 0.4% in March, as the consumer slowed their spending from the torrid level in the fourth quarter. While it was a decent level of spending in the first quarter, it couldn’t offset the drag from the pre-tariff import surge that led to the -0.3% GDP contraction. Obviously, this is a key report as move into the second quarter, hoping to push GDP back into the positive.

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Futures Market on Friday: Three 25bps Rate Cuts this Year

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After US-China Weekend Trade Discussions: Futures Now See Two Rate Cuts by Year-End

Source: CME 

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CPI vs. PPI : Wholesale Price Deflation in 2022-23 Has Turned into Reflation Making 2% CPI Target Harder to Achieve

Source: Bloomberg