The U.S.-China trade deal lifted markets
Markets kicked off the week with a sigh of relief, as U.S. Treasury Secretary Bessent and China’s Vice Premier He Lifeng agreed to a 90-day tariff rollback. U.S. levies on Chinese goods dropped from 145% to 30%, while Beijing slashed its tariffs on U.S. imports from a punishing 125% to just 10%. For now, the tail risk of a trade war escalation is gone. However, the deeper tensions haven’t disappeared: export controls, national security carveouts and combative trade stances are still very much in place. While the tone is softer, the framework is still aggressive. This isn’t peace; it’s a ceasefire. Nevertheless, equity markets liked what they saw, rallying as traders bet that this momentary ceasefire would give global supply chains a chance to breathe.
Meanwhile, another major geopolitical development unfolded, this time, in the Middle East. As President Trump toured the Gulf, news broke that the U.S. had delivered a formal proposal to Iran for a new nuclear agreement. Iran responded positively, and talks that had been indirect since April have now turned direct. With written proposals exchanged and Trump openly floating the idea of “a peaceful path”, markets are pricing in the possibility of a real deal. Brent crude oil dropped 3% on the news, as traders weighed the odds of a million barrels per day coming back online if sanctions are lifted. Even with OPEC+ likely to respond by slowing its own releases, oil equities remained resilient; they were already under-owned and de-risked after a tough year.
On the monetary front, U.S. Federal Reserve (the Fed) Chair Powell added another layer of caution to an already uncertain outlook. Speaking at the Laubach Conference, Powell warned that we may be entering a period of more frequent and persistent supply shocks, a departure from the disinflationary calm of the 2010s. He signalled that longer-term interest rates could stay elevated, not necessarily because inflation expectations are unanchored, but because the structure of the global economy has shifted. This adds yet another challenge to the Fed’s dual mandate, especially with Trump’s tariffs acting as a potential supply-side shock amplifier. Powell didn’t reference tariffs directly, but recent Federal Open Market Committee statements have alluded to their impact on growth and prices. The Fed remains cautious; rates are steady, and a full framework review is underway. But one thing is clear: the days of near-zero interest rates are behind us.
Next week, we’ll have an update on consumer sentiment from the University of Michigan. Soft data, which is survey based, has been very poor lately, while hard data has held up. It will be interesting to see where this dynamic is going. In Canada, inflation information will give us some clues about the direction of the Bank of Canada's next decision, which is still seen as a coin toss by the markets.
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