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Results of China-U.S. Economic and Trade Talks Implemented, Fed Rate Cut Pace May Change
After China and the U.S. issued a joint statement on the Geneva economic and trade talks, global markets reacted positively. On Monday, the U.S. banking sector strengthened, with major banks like Bank of America seeing gains of over 3%, and the S&P Bank ETF recovering all losses since Trump announced the ‘reciprocal tariffs’ decision. The Atlanta Fed's GDPNow model predicts that the U.S. GDP growth rate in the second quarter is expected to rebound to 2.3%. Wall Street is optimistic about the U.S. economic outlook, with JPMorgan believing that the probability of recession has significantly decreased. Last month, JPMorgan raised the likelihood of recession to 60% due to Trump’s aggressive tariff stance, but now the easing of tariffs has increased cross-asset opportunities.
However, the outlook for interest rate cuts has changed due to economic and trade progress. U.S. Treasury yields have risen, and U.S. stocks have rebounded, with traders expecting the Fed's first rate cut to be delayed until September, with a total cut of 50 basis points by the end of the year. Last week, the FOMC unanimously decided to maintain the interest rate range at 4.25%-4.50%, citing rising risks of inflation and unemployment. Fed Chairman Powell stated that economic uncertainty is high, the policy is appropriate, and Trump’s pressure will not change the way policies are formulated, indicating that rates should remain unchanged for now. After the decision was announced, the market had nearly priced in a July rate cut, with expectations of three cuts throughout the year, but these expectations were adjusted following the release of the talks' statement.
BK Asset Management's macro strategist Shrossberg stated that the economic and trade negotiations will reduce import tariffs and expand export market access, lowering the risks of economic downturn. The Fed's easing may be less than previously speculated, and the rebound in exports will support GDP growth in the second quarter. On Tuesday, the U.S. will release the latest CPI data, with the market expecting a month-on-month inflation rebound in April. Wells Fargo believes that trade changes will not be accompanied by a positive impact on consumer demand, as increasing household spending pressures may help alleviate tariff-related inflation. Citibank believes that the China-U.S. economic and trade talks will reduce the risks of commodity shortages and worsening inflation, allowing the Fed to be more patient, pushing the forecast for the next rate cut from June to July.
Additionally, although the economic and trade progress reduces the likelihood of a hard landing for the U.S. economy, it is expected not to hinder Trump from continuing to pressure Fed Chairman Powell.
