Volatility continued on Wednesday but ultimately equities saw historic upside (SPX +9.5%, NDX +12.0%, RUT +8.7%, DJI +7.9%) as US President Trump implemented a 90-day pause on reciprocal tariffs to the 75 countries who approached the US for talks, seeing their tariff rates drop to the baseline 10% to allow time for negotiations. However, Trump also announced he will be increasing China tariffs even higher to 125% from 84% after China responded to the additional US tariffs, by implementing 84% tariffs, up from 34%. Bonds were incredibly choppy but settled well in the red with chunky selling pressure seen overnight. The 10 Year Auction was very strong thanks to stellar indirect demand offsetting the dire direct demand. In response to the Trade updates, the Dollar rallied from lows with the Dollar Index closing above 103 from a morning low of83, while havens were sold with USD/JPY rising to a peak of 148.27 from lows of 144.01, while the Swiss Franc also plummeted. Gold prices rallied throughout the session but sold off on Trump’s reciprocal tariff pause, before buying resumed. Crude prices surged from lows of USD 55.12/bbl to peaks of USD 62.93 as recession risks faded on Trump’s tariff pause. Money markets now only fully price in three cuts from the Fed in 2025, versus the four priced on Tuesday. US President Trump announced a 90-day pause on reciprocal tariffs with the countries who have been in talks with the US for a trade deal. This takes trading partners’ tariffs to the baseline 10% level, for the 90-day period, giving trading partners time to negotiate a deal. However, Trump responded to China’s response, and lifted tariffs on China to 125% from 104%, after China raised tariffs on the US to 84% from 34%. Note, that there is still a lot of unknowns about Trump’s latest 90-day pause. On Canada and Mexico, a White House official clarified that there is no change to tariffs for these two economies, and more widespread there is no change to autos, steel, aluminium. Meanwhile, Trump said the reciprocal tariff pause was for those who have called the US to negotiate on “Trade, Trade Barriers, Tariffs, Currency Manipulation, and Non-Monetary Tariffs”, and “these Countries have not, at my strong suggestion, retaliated in any way, shape, or form against the United States”. It is not clear if exemptions refer to the EU or not, as earlier the EU Commission said it will impose first countermeasures against the US on April 15th with a retaliation of 10-25% on US imports (so they have not been implemented yet), noting it secured backing from EU countries for the first countermeasures against US tariffs. However, it said countermeasures can be suspended at any time, should the US agree to a fair and balanced negotiated outcome. The minutes of the Fed March 19th meeting noted that all participants viewed it appropriate to keep interest rates unchanged in light of elevated uncertainty around economic outlook. Participants remarked uncertainty about the net effect of government policies on the outlook was high, making it appropriate to take a cautious approach, and assessed that FOMC was well positioned to wait for more clarity on the outlook. Some participants observed the FOMC may face difficult tradeoffs if inflation proved more persistent while the outlook for growth and employment weakened. A few participants cautioned an abrupt repricing of risk in financial markets could exacerbate the effects of any negative economic shock. On inflation, a majority of participants noted the potential for inflationary effects from various factors to be more persistent than they projected. Almost all participants viewed risk to inflation as tilted to the upside, with risks to employment as tilted to the downside. Several participants emphasized that elevated inflation could prove to be more persistent than expected. On the balance sheet, almost all participants supported slowing the pace of balance sheet runoff, but several did not see a compelling case for a slower runoff pace – implying some non-2025 voters agreed with Waller to not slow the pace of the balance sheet runoff. Fed Member Musalem expects US economic growth this year will be materially below the estimated 2% trend, but the baseline outlook is not for a recession. However, slipping confidence, higher prices and a blow to household wealth point to slowing growth. The St Louis Fed President said that financial conditions have tightened, but he does not see market dysfunction in recent volatility. He noted markets are responding to reassessments of global growth. Musalem noted that going forward, the Fed has tension between its dual mandate goals as risks of slower growth and higher inflation begin to materialise. He noted that inflation expectations remain anchored and it is necessary for the Fed to keep them that way. Musalem warned it is risky to assume the Fed can look through higher prices from tariffs and there is a chance some effects could persist. He will be taking a balanced approach to monetary policy as long as inflation expectations remain anchored. Business contacts say they are not turning to layoffs but are taking a wait-and-see approach to hiring and capital spending plans. Meanwhile, Fed Member Barkin who is the Richmond Fed President said he is watching consumers closely, and he would worry if the US was close to a moment where consumers decide to pull back, however so far this has not happened. He warned the trade war is likely to cause fewer jobs and higher prices, but price hikes may not show up until the summer as companies work through pre-tariff inventories. Barkin thinks the impact of tariffs is going to hit both inflation and unemployment, noting some of the shifts risk being both inflationary and negative for unemployment. He said the data is still perfectly solid, but he thinks people are wondering whether consumer spending is part of the economy is at risk. Barkin also noted how in his talks to contacts, companies typically have 30-60 days’ worth of pre-tariff inventory to work through, so for impact on prices, it will likely be more about June than April. He also noted that a home improvement manufacturer said they’re not going to do the Memorial Day promotion that they would normally do, as they only have a limited amount of inventory at a lower cost. Barkin also noted there may well be disinflationary forces too, citing lower oil prices and the impact of retaliation on some of their export manufacturing. Elsewhere, Oil surged 5.8% while Gold had is biggest one-day rally since 2016, closing Wednesday with a gain of 3.81%.
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