One country down, only 194 more to go. This week, the announcement of a “framework” for President Donald Trump’s first trade deal and the first high-level meeting between the U.S. and China encouraged investors.
Wall Street’s enthusiasm was somewhat tempered, given that the United Kingdom was an easy deal to make. The terms of trade have always favored the U.S., where we have run a capital trade surplus for years.
We have long exported far more to the UK than it has sold to America. Nonetheless, it did provide movement on the tariff question that has troubled the markets since “Liberation Day.”
On the China front, U.S. Treasury Secretary Scott Bessent will meet with his counterpart in Switzerland this weekend; on Friday, Trump floated the idea of a possible decline in U.S. trade tariffs to 80 percent, which he said “seems right.” It was a clear message to the Chinese that he wanted to deescalate his trade war.
The administration is reportedly lining up deals with several other countries. India, South Korea, Japan and Australia are in the queue, although the timing is still a question mark. India would have been first out of the box, but the government’s attention has been focused elsewhere over the past two weeks. The delay in an announcement is due to the present hostilities between India and its neighbor, Pakistan.
Given the news on tariffs, this month’s Federal Open Market Committee meeting came and went with hardly a blip. The Fed announced that they were going to sit on their hands for the foreseeable future. Chairman Jerome Powell made it clear just how uncertain the future was, particularly in relation to the Trump administration’s policies and their potential impact on inflation, the economy and employment.
None of this was a surprise. Few on Wall Street had expected anything more from the Fed than the word “uncertain” when describing Fed policy in the future. In the meantime, stocks climbed higher while precious metals, the dollar, and interest rates continued to be volatile. Gold traders were whipsawed as bullion prices have swung in $50-$100 increments daily this week. The U.S. dollar, which has been in freefall for a month, has also been erratic, while bond yields are in a trading range lately with no significant moves either way.
Both foreign and domestic traders believe the U.S. dollar will fall further. As such, they are looking at currency alternatives to place bets. Gold was the first go-to asset, but speculation has driven the price too far, too soon. Cryptocurrencies appear to be an acceptable alternative for the time being. Bitcoin reclaimed the $100,000 price level on Thursday and seems destined to climb to the old highs at around $120,000.
Last week, I wrote, “For markets to continue their recovery, we need to see the following. A peace deal, the tariffs disappear, China and the U.S. come to a trade agreement, the Fed cut rates, and/or no recession.” I forgot one more option: the successful passage of Trump’s tax bill, which could significantly impact the market dynamics.
Any two of the above will be enough to stave off a retest of the lows. Thus far, we have made progress on the tariff front (UK, China, etc.). However, tariffs will not disappear altogether. It appears that no matter what, a 10 percent tariff on imports is here to stay.
I would guess the possibility of the passage of Trump’s “Big Beautiful Bill” is high, given that the Republican Congress now functions as a rubber stamp on the wishes of the president. We will not see a recession this year, although I see a decline in GDP in the second quarter to +1.3 percent and +1.28 percent for the third quarter, which fits with my stagflation scenario.
As I keep reminding readers, markets are heavily influenced by Trump’s decisions. This week, his statements gave stocks and other assets a boost. We did breach 5,700 on the S&P 500 Index intraday before falling back but have yet to reach my short-term target of 5,750.
