Digest | 12 May 2025
- Edward von der Schmidt
- 8 hours ago
- 5 min read
Encouraging dialogue and a trade war reprieve between the US and China bought time but not certainty as global risk markets reacted with cautious optimism. The S&P 500 rallied 3.3% and major equity indices climbed in unison while the dollar firmed and Treasury yields jumped. Geopolitical risks abound and diplomacy concerning Kashmir, Gaza, Iran, and Ukraine remained in flux. Central bankers sought to carefully assess evolving economic context to better inform monetary policy despite outlook risks. US lawmakers prepared budget proposals ahead of committee meetings. April CPI inflation data will be released on Tuesday, when President Trump begins an official tour in the Middle East.
EDWARD VON DER SCHMIDT
Around the World
US-China:
The US and China jointly announced an agreement to reduce punitive tariff rates from 145% and 125% to 30% and 10%, respectively, for a 90-day period. The countries agreed on a consultation mechanism for future negotiations, and China also agreed to lift countermeasures restricting rare earths and other exports. Section 232 tariffs (autos, metals, etc.) were not affected, nor were tariffs imposed under the first Trump administration. The US will be focused on strategic rebalancing and supply-chain independence in areas deemed critical to national security. Treasury Secretary Bessent remarked, "we are in agreement that neither side wants to decouple". (Reuters, Bloomberg, AP)
The head of the Port of Los Angeles did not expect the tariff pause to fully restore cargo volumes as significant levies were in place and business uncertainty remained. (Bloomberg)
***
While a welcome pivot away from a full-scale trade embargo, a temporary pause without guidance on the future direction of policy will prolong business uncertainty and continue to handcuff economic decision-making. Adversarial posturing has already had a chilling effect. Higher prices and slower growth are on their way and may become more conspicuous later this Summer - a restocking boost notwithstanding.
Kashmir:
A tenuous peace prevailed between India and Pakistan after a US-announced ceasefire held. Indian Prime Minister Modi spoke to a "new normal" of heightened military readiness, adding that the conflict had only "paused" and that the nation reserved the right to "retaliate on its own terms" in response to terrorism or armed provocation. Dialogue between the heads of military operations continued. The unresolved suspension of the Indus Waters Treaty will remain a point of contention. (AP, Bloomberg, Reuters)
Russia-Ukraine:
After European leaders announced US-supported plans for sanctions on Russia barring a 30-day ceasefire to begin on Monday and Russian President Putin countered with bilateral talks with Ukraine "without conditions" in Istanbul on Thursday, President Trump suggested he might join the latter to set off a diplomatic scramble. Russia has pointed to the Istanbul Communique abandoned in 2022, which would have essentially exchanged Ukrainian neutrality for UN-backed security guarantees but without precluding EU membership. European Commission Vice President Kallas stated that "if there is no ceasefire there cannot be talks under fire". (AP, Reuters)
Poland announced that it would close the Russian consulate in Krakow. (Reuters)
Middle East:
President Trump will begin a regional tour in Riyadh on Tuesday as he plans to meet leaders from Saudi Arabia, Qatar, and the United Arab Emirates this week. (AP)
A ceasefire was no more imminent after American hostage Edan Alexander's release from Hamas captivity was brokered in four-way talks between the US, Hamas, Egypt, and Qatar. Israeli Prime Minister Netanyahu spoke to a forthcoming military "intensification" as the Integrated Food Security Phase Classification warned of the "high risk" of outright famine in Gaza. (AP)
The Kurdistan Workers' Party or PKK formally disbanded after four decades of insurgency, bringing a measure of stability to Turkey as well as Iraq and Syria. (AP)
Iran:
A fourth round of Omani-mediated talks between the US and Iran this weekend ventured onto more technical ground as the central question of uranium enrichment elicited the possibility of compromise in degree. (AP)
US-Japan:
Japanese Finance Minister Kato planned to continue discussion regarding foreign exchange with Treasury Secretary Bessent at next week's G7 finance ministerial in Canada. (Reuters)
China-CELAC:
On Tuesday, an economic cooperation forum between China and Latin America and the Caribbean brought Brazil, Colombia, Chile, and others to Beijing to discuss cooperation under China's Belt and Road Initiative. China announced that it would extend $10bn of credit - denominated in yuan. (Reuters)
Central Banks, Governments, & Data
Federal Reserve:
Speaking at a Central Bank of Ireland symposium in Dublin, Governor Kugler continued to expect "an increase in prices and a slowdown in the economy". She commented that the US-China tariff pause "changed [her base outlook] in terms of the extent to which we need to use our tools, and the magnitude". (Reuters)
"Economic Outlook"
In an interview with the New York Times, Chicago Fed President Goolsbee envisioned a lesser "stagflationary impulse on the economy" in the wake of the US-China tariff pause. (via Reuters)
***
To the extent that the US-China trade detente reduces near-term recession risks or the degree of an anticipated slowdown, the Fed will face appreciably less pressure to cut rates sooner. If anything, the sequence of 90-day pauses on reciprocal tariffs and those with China will push policy clarity out to the Fall along with the labor market and price impacts the Fed will seek to assess before committing to a different path. Depending on the evolution of the economy and the severity of production disruptions and decision paralysis already suffered, a September cut is still possible. Nevertheless, it may be that any monetary easing will be pushed into December or next year, which appears increasingly likely. The forthcoming SEP forecasts at the June FOMC should provide insight as to when Fed officials might believe they'll have sufficient clarity to consider accommodation. Expect a slow ride for the time being.
Bank of Japan:
BoJ Deputy Governor Uchida expected wages and prices to continue to rise in Japan and for the central bank to resume rate hikes if an improving backdrop were to follow an anticipated slowdown. (Reuters)
Bank of England:
The BoE's Taylor supported his call for a 50bp cut at the previous meeting in light of a "quite perilous" trade backdrop and faltering domestic demand. Deputy Governor Lombardelli and MPC member Greene also spoke at King's College, London.
European Central Bank:
The ECB's Joachim Nagel and Jose Luis Escriva spoke in a joint interview for Sueddeutsche Zeitung and El Mundo. Escriva advised that policymakers "be humble in assessing the current situation" and Nagel added that it was "important to be cautious and not to overreact" as both officials advocated measured policy assessments even with further ECB rate cuts anticipated. (Bloomberg)
Capitol Hill:
GOP lawmakers put forward sizable spending reductions in Medicaid, food assistance programs, and climate-related subsidies in an effort to finance substantial tax cuts in budget legislation ultimately headed for reconciliation. With a number of committee deliberations slated for this week, support in the House and Senate remained an open question. (AP; see "House GOP reveals Trump's tax breaks for tips, overtime and car loans, but costs run high")
SCOTUS:
Chief Justice John Roberts characterized the rule of law as "endangered" in remarks on Monday. (Politico)
US - Car Prices
Cox Automotive Kelley Blue Book data showed effective prices for new cars rising 2.5% in April, the largest such increase since April 2020. (Reuters)
US - Inflation:
CPI data for April will be released on Tuesday, May 13 at 8:30am ET.