The United States and China have made a good deal great. Most importantly, they will eliminate mutual tariffs between the two countries to 10%. The negotiations, held in Switzerland over the weekend, resulted in a three-month truce in their long-running trade war. This settlement will go into effect right before trading opens on May 19th. It reduces fears that a looming trade war will lead either country—or the world—into recession.
Under the new deal, the U.S. has agreed to reduce high tariffs for a period of 90 days. It reauthorizes and maintains the 20% tariffs on Chinese imports associated with fentanyl. Consequently, total tariffs on China will still be 30% (combined U.S. tariffs alone are 17.5%). This step back from a blunt retaliation approach suggests that both sides are willing to offset some of the trade burden while moving towards fulfilling some targeted concern.
Wall Street responded enthusiastically to the news, basking in a two-day, 1,000-point rally immediately following the announcement. The Dow Jones Industrial Average rose more than 1,100 points to the good, its largest single-day point haul since April 9. In like manner, the S&P 500 surged by an astounding more than 3%, bringing its year-to-date deficit down to a mere 0.6%. The Nasdaq Composite made new all-time highs, gaining 4.5% of its value, as investor expectations and sentiment improved dramatically.
This reduction in tariffs has renewed hopes among traders that a lengthy trade war can be averted. Analysts agree that this would go a long way toward stabilizing both economies at least in the short run.
“We will be digging into the data to see if [March’s] slower pace continued or if reports of higher costs for some businesses, which have been reported in recent survey data, have translated to higher prices for consumers,” – Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management.
Besides the ongoing tariff negotiations, all eyes are on key economic indicators as well. We’ve likely seen the peak of the consumer price index, holding at 2.4% year-over-year in April. Excluding food and energy, core inflation is still running at a 2.8% annual rate. These metrics are likely to be key in determining the course of U.S. monetary policy in the months ahead.
We think that the deal agreed upon between the U.S. and China represents a historic step forward. That further contributes to alleviating the trade tensions that have marred their relationship in recent years. Challenges remain, including continued responsibilities on fentanyl-related imports. The agreement foreshadows an impending thaw in relations that would serve to prop up global markets.