Expectations for Fed rate cuts slow down again?

After a major breakthrough in tariff discussions between China and the U.S., a long-lost sense of optimism returned to global markets. The tariff reduction agreement announced in the joint statement from Geneva directly caused prices of safe-haven assets to plunge, the dollar to strengthen, and the anticipated path of interest rate cuts to be reevaluated.

Tariff Truce Ushers in a New Era: Global Risk Sentiment Shifts

Following the China-U.S. joint statement, market sentiment shifted sharply. The U.S. announced the cancellation of 91% of punitive tariffs and suspended plans for an additional 24% of "retaliatory tariffs." Similarly, China canceled 91% of its corresponding counter-tariffs and suspended the execution of the corresponding 24% tariffs. This temporary 90-day truce injected a much-needed boost into the global economy.

This breakthrough negotiation occurred during the first face-to-face meeting between senior U.S. and Chinese officials in Geneva, marking a turning point in the bilateral trade relationship that had been overshadowed by tariffs for years. The trade volume, which had reached nearly $600 billion, once stagnated due to tariff disputes, affecting global supply chains and causing widespread market concerns.

In the joint statement, both parties emphasized the continuation, mutual benefit, and open cooperation of their economic and trade relations, and stated that they will continue to advance follow-up work based on mutual respect and communication. This signal is widely interpreted by the market as a positive indication of stabler China-U.S. relations.

Direction Shift: Federal Reserve's Easing Policy Cooled

Influenced by trade relaxation, the outlook for the U.S. economy has improved significantly, rapidly diminishing the previously high expectations of rate cuts. The latest federal funds rate futures now only account for two expected rate cuts, instead of the previous three.

Although last week’s FOMC decision kept rates unchanged and acknowledged rising economic uncertainty, with trade risks diminishing, the probability of a recession has been revised down. JPMorgan significantly reduced the likelihood of a U.S. recession from last month’s 60% to 35%, noting that recent trade negotiations and strong corporate earnings would bring new intersectional opportunities for the stock and bond markets.

Boris Schlossberg, a macro strategist at BK Asset Management, pointed out that if the trade agreement could expand U.S. goods market access and reduce the cost of imported goods, it would help improve U.S. export performance, thereby supporting GDP growth. He predicts that the U.S. economic growth rate in the second quarter is likely to rebound to 2.3%.

Financial Markets React Swiftly: U.S. Stocks and Banking Sector Rise

The U.S. banking sector, an economic weather vane, was the first to respond. Financial stocks such as Bank of America, Wells Fargo, Citigroup, and Goldman Sachs all strengthened, with gains exceeding 3%. The S&P Banking ETF successfully broke past its highest point since April 2, recovering all losses since the "retaliatory tariffs" announcement.

The market remains attentive to the upcoming U.S. CPI data release. There is a general expectation of a temporary rebound in April inflation month-on-month, with cost items and consumer inflation expectations in the PMI report already showing initial signs. If the CPI rebounds beyond expectations, it will further suppress the likelihood of rate cuts and could reignite volatility in the gold and bond markets.

Summary:

Amid multiple positive factors resonating, the reconciliation of China-U.S. economic and trade relations has become a key turning point for the market's shift towards optimism. Although the Federal Reserve is likely to remain on hold in the short term, the expectations for aggressive easing within the year have significantly cooled, requiring investors to reassess risk preferences and asset allocation strategies.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.