Outlook The 90-day tariff truce between the U.S. and China provides a sense of hope that some of the uncertainties of the past several weeks can be downgraded. When the 100%+ level of tariffs on both sides surprised many when they were initiated, commentators buckled in for a long and protracted trade war. However, what may be just as surprising is the swiftness of their reduction this past weekend. This is generally positive news for the economy, and the timing seems to be helpful. The Federal Reserve of Atlanta's GDP Nowcast offers a daily pulse on the economy - specifically providing an estimate on economic growth. For the bulk of March and April, the indicator showed that the economy was contracting. This was confirmed by the official GDP growth estimate for the first quarter. Fortunately, the GDP Nowcast has turned positive recently, giving hope, along with a lowering of trade tensions, that an economic recession may be avoided. . . . The U.S. equity market finished narrowly down for the week as investors digested slightly hawkish speak from the Federal Reserve’s Chairman Jerome Powell. However, it rebounded on positive trade news, with the U.S. announcing a trade deal with the United Kingdom. For the week, the Dow Jones and S&P 500 edged lower by -0.2% and -0.5%, the tech-heavy Nasdaq slid -0.3%, and the Russell 2000 advanced 0.1%. U.S. Trade Deal with the U.K. The U.S. and the U.K. announced a new trade deal on Thursday. The announcement marked the first official trade agreement for the U.S. since the new tariffs were announced on Liberation Day (April 2). The deal has been finalized although both countries indicated the intent to negotiate further with the potential to expand the agreement. The deal includes:1 - The 10% reciprocal tariff on most imports from the U.K. will remain in effect.
- The first 100,000 vehicles imported by U.K. manufacturers will be subject to the 10% tariff rate; any additional vehicles will be subject to a 25% tariff rate.
- U.S. tariffs on imported steel and aluminum from the U.K. will be eliminated.
- The U.K. will reduce or eliminate tariffs on certain U.S. exports, including ethanol and other agricultural products (such as beef).
The agreement demonstrates trade talks are progressing between the U.S. and other countries. This deal could serve as a framework for other countries with similar trade dynamics, whereas deals with top trade partners may require a more complex and extensive negotiation process. In other trade news, Chinese and American officials agreed to meet in Switzerland over the weekend to discuss the trade dispute. The meeting resulted in a 90-day suspension of excessive tariffs levied on both countries. The U.S. has agreed to cut tariffs on Chinese goods from 145% to 30%, whereas China has agreed to lower tariffs on American goods from 125% to 10%. De-escalation of trade tensions, specifically between the world’s two largest economies, should result in positivity for the markets and overall economy. The U.S. equity futures market surged following the news.2 Federal Reserve Holds Rates Steady The Federal Reserve concluded its May Federal Open Market Committee (FOMC) meeting on Wednesday, maintaining the target federal funds rate in the range of 4.25 - 4.50%, where it has been since December. The move was widely expected and marked the third consecutive meeting of pauses, as the Fed notes concern over potential economic impacts from tariffs. The FOMC updated its statement to reflect the view of risks to both sides of its dual mandate. The statement states, “uncertainty about the economic outlook has increased further… and judges the risks of higher unemployment and higher inflation have risen.”3 Fed Chairman Jerome Powell emphasized the economy is still in solid shape and shows signs of resilience, noting strong payrolls, while weakness has crept into the latest gross domestic product report (GDP) although this largely reflects a pull forward of imports (which is subtracted from the growth calculation).4 Most economists expect the economy will return to positive growth in the second quarter. Powell acknowledged a healthy labor market5 - Nonfarm payrolls increased by 177,000 in April, with the unemployment rate holding steady at 4.2%, and inflation ticking lower as the Fed’s preferred measure of inflation (PCE) sits at 2.3%.6 Overall, these metrics are likely to give the Fed some flexibility to play a more defensive role until the potential impact of tariffs is reflected in inflation and the economy. While tariffs could reflect higher prices (at least temporarily), the impact is believed to result in sustained inflation. The future’s market still expects the Fed to resume easing later this year, likely ending the year with the federal funds rate between 3.50 – 4.00%.7 | 
