Trump pivots on tariffs

President Trump announced a 90-day pause on most new tariffs, temporarily reducing them to 10% to encourage trade negotiations, while sharply raising tariffs on Chinese imports to 125% amid escalating tensions. Markets reacted positively, with the S&P 500 rallying nearly 10% as investors welcomed the temporary reprieve. However, critics argued the policy remains erratic and reactionary, particularly as China immediately retaliated by raising tariffs on U.S. goods to 84% and filing a WTO complaint. Analysts caution that despite this pause, the overall tariff environment continues to pose risks to global trade.

• Despite the administration’s insistence that this was the plan all along, most market participants believe it was the 10-yr yield trading close to 4.5% that finally convinced them they needed to change course
• The US desperately needs lower rates, given there is $9 trillion of debt that needs to be refinanced in the next 12 months
• With yields heading higher, this was becoming a real issue
• Many blamed rising rates on the unwinding of certain highly levered hedge fund strategies; however, it is also feasible that many of the big sovereign holders, namely China and Japan, may have sold bonds and contributed to this
• Despite the reprieve for the stock market, yields remained elevated post the announcement, leaving us in a precarious position
• The administration needs to move quickly in announcing deals with other major trading partners, before collectively approaching China to create a workable solution
• The longer this remains in limbo, the more economic damage will occur

Inflation moderates, giving room for Fed cut

​In March 2025, U.S. inflation showed mixed signals. The Consumer Price Index (CPI) decreased by 0.1% month-over-month, bringing the annual rate down to 2.4% from 2.8% in February. Core CPI, which excludes food and energy, rose 0.1% month-over-month and 2.8% year-over-year—the smallest 12-month increase since March 2021.  Producer prices also declined, with the Producer Price Index (PPI) falling 0.4% month-over-month—the first drop since October 2023. This was led by a 0.9% decrease in goods prices, particularly an 11.1% drop in gasoline costs. Services prices fell 0.2%, influenced by declines in airline fares and hotel rates. However, core PPI, excluding food and energy, edged down 0.1% month-over-month and increased 3.3% year-over-year, indicating persistent underlying inflationary pressures.

• As the economy slows, it naturally creates downward pressure on inflation
• The most recent data is starting to show us that this may be happening
• The Federal Reserve has been steadfast in not accelerating its rate cuts until they have a better sense of declining inflation
• If the bond market continues to trade off (yields going higher), the Fed may need to help stabilize it, potentially cutting rates more aggressively and re-launching Quantitative Easing (buying bonds)
• The recent inflation data may give the Fed enough cover to be able to do so
• Temporarily, this would be a positive for stocks; however, longer term, we still run the risk of inflation re-accelerating, particularly depending on the outcome of the tariff talks

Geopolitical tensions intensify

Geopolitical risks have also intensified this week. Tensions around Taiwan have escalated, with growing concern China might exploit current trade disputes to expedite plans for reunification, potentially triggering U.S. military involvement. Concurrently, the Trump administration is engaged in negotiations over Iran’s nuclear capabilities, openly signaling a willingness to direct military action through Israel if diplomacy fails. These concurrent pressures in Asia and the Middle East significantly elevate global uncertainty and market volatility.

• As China is dealing with Trump’s trade war, it may use it as an excuse to accelerate its plans to reunify Taiwan
• As the US is dealing with a major conflict in the Middle East, this may strain US military resources
• It would not be surprising if the US Navy is already relocating its ships to Asia from the Middle East
• The fallout from a military conflict with China is hard to comprehend, but it would almost certainly be worse than the trade war we are already in
• It doesn’t seem that markets are currently pricing in this risk

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