Whether the tariff policy of the US Administration jeopardises US and global growth and poses any danger to public finances depends on one’s view. For the medium-term, as discussed below, it is a gnarly undertaking to foretell an unconditional prosperity. We are, however, living at times when planning for the medium, let alone long-term, is simply irresponsible. All that is left to rely on are headlines and the whim of President Trump. The unexpected reversal in bellicose rhetoric and action against China was greeted on Monday by a massive rally in equities and a somewhat lukewarm advance in oil prices. The mood remained bright yesterday as US inflation fell to 2.3% in April, down from 2.4% in March. The reading came as a relief for the Fed as well as for equity bulls. Naysayers, including us, on the other hand, argue that it will take another month to feel the full impact of the import taxes announced in April.

Releasing May economic data is still a month, or in Trump’s world, light years away. For now, the market can only cook with readily available ingredients, and they are currently not spicy or bitter. Lower-than-expected rise in US consumer prices, just like the slashing of Chinese import duties ameliorates demand prospects, and when it is coupled with further US sanctions on companies dealing in Iranian oil with China, the net result is a jump of $1.70/bbl in crude oil prices. These gains were bettered by the daily jump of $2.50/bbl equivalent in Heating Oil as traders correctly envisaged a considerable drawdown in US distillate inventories reported by the API last night. The slight retreat this morning is the function of a surprise crude build, but the stars are aligned for further strength for now, although red flags can and possibly will be raised at any time.

De-escalation and Confusion

The most important macroeconomic event of the past two months has irrefutably been last weekend’s trade talks between the US and China. The rudimentary interpretation is unreservedly auspicious and supports the growing hunger for risk. The world’s two biggest economies are responsible for nearly 50% of the total output in goods and services. The value of the trade in goods between them was estimated at $582.4 billion by the USTR (United States Trade Representative) in 2024 with Chinese exports exceeding US sales by $295.4 billion. When you add 145% or 125% to that, consumers in the two nations will have to pay more than double for the imports from the other country. It leads to a literal halt of the movement of goods, and as such, it is obviously unsustainable. The 100% temporary reduction in punitive measures raised the hopes of a permanent, mutually beneficial trade agreement.
One of the striking aspects of the weekend’s deal is that it can be viewed as an explicit admission of the inefficiency of trade barriers by both sides, more by the US than China. The former has followed a similar path to the 90-day pause of the highest tariffs introduced on ‘Liberation Day’. Yet, the temporary trade truce, just like most of the trade policies of the US, raises more questions, and it is impossible to answer them unequivocally. Is it legally binding? Given that both the US and China are still members of the World Trade Organisation, does it (or any other bilateral US trade deal) violate the Most-favoured-nation principle? Will reduced import tax rates, should they be made permanent, be sufficient to make up for the shortfall created by tax cuts?  Will they incentivise the re-patriating of manufacturing activity? Is the US credibility as a reliable trading partner on the mend?

These are the questions that will take months to get answers to, and they will come in the form of hard economic data. In the meantime, when attempting to assess the possible impact of the weekend's talks, all one can do is compare the present circumstances with those of the pre-Trump era and their relations to risk asset prices. The comparison can and should be applied to the global economy, too.

No doubt, the weekend’s agreement reduces the odds of a US recession and provides breathing space for China, after all, the US is one of the most pivotal markets for the Far East nation. Nonetheless, it must be noted, underlined and emphasised that the Biden Administration did not remove the import taxes on China imposed during the first Trump term. According to Fitch, the US effective tax rate on the world’s second biggest economy was 10.7% in 2024, it is now 31.8%. The outlook, therefore, has conspicuously deteriorated. The same approach can be used for the US trade with the rest of the world. The average US tariffs on global imports stood at 2.3% between 2018 and 2024, comparable with the current effective rate of 13.1%. Considering that global equities never were significantly higher prior to 2025 than they are now, one can only conclude that economic prospects, based on increased tariffs, would not justify a protracted stock market rally. For now, a recession was probably avoided, but economic growth is hitting a brick wall, and those bricks were produced in the US.

When economic prospects are limited, the outlook for oil demand is also somewhat cloudy. China and the US consume around 36 mbpd of oil, more than 30% of the total, which was cut in recent months by investment banks and international organisations. The latest snapshot taken after last weekend’s talks insinuates that no further downgrade is impending, but given staunch economic headwinds, demand is expected to remain stagnant, at best. It should grow less this year than non-OPEC+ supply (the outlier is OPEC, which will likely stick to its long-held view of tightening oil balance and falling inventories in 2025 when releasing its monthly report later today). Add to that the marked change in output strategy from the producer alliance, and you will deduce that last year’s price levels will never be challenged. The impediment to economic prosperity caused by erecting trade barriers dawned on the US Administration, hence the recent and not exactly selfless leniency shown towards trading partners. Returning to the pre-Trump status quo in global trade, however, is unimaginable, therefore, the weekend’s deal with China is probably the pinnacle of what we will see in the foreseeable future with a decent chance of flare-ups in acrimony leading to increased excise duties once again.

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