In the wake of President Trump’s recent pivot on tariff policies, financial markets are regaining momentum, albeit cautiously. The rollback of most U.S.-China trade duties has sparked optimism, lifting the S&P 500 closer to its February highs while the dollar has slipped, and oil prices have softened significantly—down by roughly $10 a barrel. Despite these shifts, the broader economic impact of tariffs has been surprisingly restrained so far.
Data from Capital Economics suggest the effects are more subdued than expected. Although customs duties rose notably in April, many firms appear to be managing the pressure by pausing imports and tapping into inventories. This measured response is echoed in inflation data, where core goods prices edged up only slightly. Some categories like clothing and used cars even saw price declines, offsetting gains in others. Walmart’s CEO recently acknowledged that the retail giant couldn’t absorb all of the tariff costs, but significant consumer price increases have yet to materialize.
This mild inflation backdrop has allowed for a revision in economic expectations. Capital Economics now anticipates Q2 GDP growth at 2.6%, up from 2.0%, and expects core CPI to peak below 4%. These estimates suggest that while tariffs carry long-term risks, their short-term sting may be dulled by resilient consumer demand and timely inventory strategies.
Still, investors are navigating a complex macro environment. Moody’s recent downgrade of the U.S. sovereign rating—citing the country’s growing debt burden—shook confidence, though analysts at Morgan Stanley see this more as a rate-sensitivity event than a fundamental deterioration. The firm views current market weakness as a potential buying opportunity, especially in cyclical sectors. However, it warns that sustained upside depends on earnings momentum and stable bond yields.
Meanwhile, global energy markets remain volatile. Talks between the U.S. and Iran over nuclear activity have stalled, with Iran refusing to halt uranium enrichment. This deadlock keeps oil prices choppy as investors weigh the likelihood of sanctions being lifted. Elsewhere, geopolitical developments add further uncertainty. A tentative push for ceasefire negotiations between Russia and Ukraine offers some hope but remains fraught with complexity.
Even with easing inflation and expectations of lower Fed rates, the U.S. dollar continues to struggle. Interestingly, this hasn’t translated into a strong rally for gold, which has seen limited upside despite persistent geopolitical tensions.
In this environment, investors should brace for volatility but avoid overreacting. While headlines drive sentiment in the short term, the underlying fundamentals—moderate inflation, steady growth, and selective sector resilience—suggest there’s room for strategic optimism.
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