Markets Welcome US–China Trade Truce

For the week ending 15 May 2025

As of midday Friday, global equities were significantly higher on the week as global trade tensions eased. The yield on the US 10-year Treasury note rose 4 basis points from the week before to 4.40% while the price of a barrel of West Texas Intermediate crude oil rose $1.75 to $61.95. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 19.35 from 22.10 last week.

MACRO NEWS

Deescalating trade tensions send stocks higher

Last weekend’s unexpectedly fruitful negotiation between the United States and China sent stocks sharply higher this week, with international equities reaching record levels. As of Thursday’s close, the MSCI ACWI ex US index has rallied more than 18% from its recent lows to post new all-time highs after China and the US put a 90-day pause on most of the tariffs the two sides imposed on each other in early April. Negotiators met in South Korea on Thursday to continue the discussions begun in Geneva. Markets were quick to react to the news, with economists increasing their forecasts for US GDP growth while reducing the odds of recession. Many strategists also upgraded their earnings forecasts on the assumption that the worst of the trade battle is likely behind us. On Thursday, Bloomberg reported that the US and European Union have agreed to accelerate the pace of trade talks amid reports of a new EU proposal that would lower trade and non-tariff barriers and boost both European investment within the US and the purchasing of US goods.

On Friday, Trump said he would set tariff rates for US trading partners “over the next two to three weeks,” saying his administration lacks the capacity to negotiate deals with all its trading partners. Countries would be able to appeal, Trump said. Negotiations continue with the US’s largest trading partners.

US inflation was contained in April

Consumer prices in the US rose 0.2% in April both at the headline and core levels while rising 2.3% at the headline level and 2.8% ex food and energy. The 2.3% reading on the headline measures was the lowest since February 2021. Producer prices were also muted last month, with PPI falling 0.5%, well below expectations. On a year-over-year basis, the index gained 2.4%. Taken together, the CPI and PPI reports suggest that core PCE, the Fed’s preferred inflation measure, should rise about 0.15 month over month in April. That data will be published on May 30.

Hopes for Iran nuclear deal pressure oil prices

Oil prices slumped Thursday after President Trump indicated that the US is close to striking a deal with Iran to end its nuclear weapons program. The US presented Iranian negotiators with a proposal last weekend which they took back to Tehran for consideration. Sanctions against Iran would likely be lifted as part of any agreement, opening world markets to Iranian oil production for the first time since the US abandoned an Obama-era nuclear agreement in 2018. Sanctions on Syria may be lifted as well after Trump met with the country’s new leader in Riyad on Wednesday. 

QUICK HITS

US retail sales rose 0.1% in April, falling short of forecasts, though March sales were revised to up 1.7% from 1.4%. The cooler April spending data appears to be payback for March’s tariff frontrunning.

Canada’s S&P/TSX Composite Index hit a record high on Thursday.

Deflation persisted in China in April as consumer prices fell 0.1% year over year while producer prices continued their slide, falling 2.7%. PPI has been negative on a year-over-year basis every month since October 2022.

German Chancellor Friedreich Merz pledged on Wednesday to turn Germany’s army into the strongest in Europe and said he plans to make the country more competitive on the global stage.

Fitch Rating upgraded Argentina’s sovereign debt rating to CCC+.

Unemployment in the United Kingdom ticked up 0.1% in March to 4.5%.

The Trump administration said it would cut tariffs on low-value parcels from China to 54% from 120%, hours after Washington and Beijing agreed to a 90-day trade truce.

The US Treasury collected $16.3 billion in tariffs in April, a record. Fiscal year to date, the government has collected $63.3 billion in customs duties.

European Central Bank policymaker Klaas Knot said this week that the US dollar is “pretty far” from being dethroned as the global reserve currency.

The CEO of US retail giant Walmart said Thursday that the US consumer remains on solid footing, though he acknowledged that the company will not be able to absorb all the costs associated with tariffs and that prices will have to rise.

China’s trade surplus with the EU hit a record $90 billion in Q1, sparking worries that Chinese goods are being dumped into European markets.

Trump signed an executive order on Monday directing drugmakers to lower the prices of their medicines to align with what other countries pay. The order gives drugmakers price targets in the next 30 days and will take further action to lower prices if those companies do not make progress toward those goals.

In Q1, the eurozone economy grew 1.2% year over year, in line with forecasts.

Mike Johnson, the Speaker of the US House of Representatives, hopes to bring Trump’s One Big Beautiful Bill (its official name) up for a floor vote ahead of Memorial Day weekend though GOP lawmakers remain divided over the size of the cap on deductions for state and local taxes.

During a tour of the Middle East this week, President Trump announced billions of dollars in commitments from governments and businesses to increase investments and purchase products from the US. 

The Bank of Mexico cut its policy rate 0.5% to 8.5% on Thursday as economic growth slowed. The central bank has cut rates a half-point at its last three meetings.

Over the weekend, President Trump brokered a ceasefire between India and Pakistan. Military chiefs from both sides are discussing next steps to restoring calm at the border.

US housing starts rebounded in April, rising 1.6% after a 10% decline in March. Building permits declined 4.7%.

Japan’s economy contracted 0.7% on an annualized basis in Q1. It was the first contraction in a year.

While backward-looking US economic data remain resilient, poor sentiment readings persist. On Friday, the University of Michigan consumer sentiment index fell to its second-lowest reading on record at 50.8 while year-ahead inflation expectations soared to 7.3%, the highest since 1981.

THE WEEK AHEAD

Monday: eurozone CPI

Tuesday: Canada CPI

Wednesday: Australia RBA rate decision, UK CPI

Thursday: Preliminary global PMIs, US existing homes sales

Friday: UK retail sales, US new home sales

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.