Trump's escalate to de-escalate strategy continues.
The trade war "escalate phase" resulted in the escalator down for stocks. The "de-escalate phase" has resulted in the escalator UP and a full V-shaped recovery in stocks.
Does the de-escalation with China, in the form of a 90-day tariff reduction, mean a trade deal is coming with primary target of the trade war?
That seems unlikely.
Bessent talked about three issues that were discussed with the Chinese delegation over the weekend. The Chinese currency wasn't one of them.
China's artificially weak currency is the cornerstone of the Chinese economic model. And there will be no meaningful change in global trade imbalances so long as China is allowed to keep undercutting the world on exports, by pinning down the value of the yuan.
But a 90-day pause buys some time.
Remember, just a few weeks ago, Bessent called on the IMF and World Bank to "return to their mission." Doing the jobs they were created to do would mean policing China's manipulative economic policies (which includes currency manipulation). The Trump team smartly wants to leverage institutional confrontation on China's rigged economic model, which would (importantly) help build global buy-in to isolate China.
Now, the Fed has been holding rates steady since December, on the anticipation that tariffs would be inflationary.
The actual data has been disinflationary.
Now the tariffs have been broadly slashed, at least for a while.
One might think that would reinforce the disinflationary trend. Yet the market is now pricing in fewer rate cuts (implying more inflation pressures following the China 90-day tariff reduction).
With all of this, we get April CPI tomorrow.
It's expected to tick down from a year-over-year rate of 2.4% in March to 2.3% in April. That would be the lowest inflation since early 2021, and lower than the level of inflation in September of last year, which is the month the Fed kicked off its easing campaign — with a 50 basis point rate cut.
