A major policy shift saw the US cut tariffs on Chinese products from 145% to 30% at the start of last week, with Beijing responding with similar tariff cuts. The news came as a surprise to financial markets, significantly reducing fears of a US recession that had been heightened by growing concerns about widespread supply chain disruptions, writes Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, in his latest market update.
Chinese tariffs are now 10% higher than they were at the start of 2025, a hike similar to that seen in other countries around the world. “Trump appears to have backed away from the idea of a broader trade war. While it seems likely that tariffs could rise if no new deals are struck, markets are happy to see a more pragmatic approach being taken.”
Interestingly, Dowding says, since the US election, the S&P 500 is now higher, interest rates are lower, inflation has fallen as has oil prices, the dollar has weakened, tariff revenues have risen, and the economy is still at full employment. There is even an American Pope. “With the exception of brokering a peace deal between Russia and Ukraine, the first 100 days in office suddenly don’t seem so bad when you look at it that way!”
5D Chess Game
While Trump continues to sow confusion and concern, some market watchers say the president is playing a clever 5D chess game. But it could all just be coincidence, the CIO says.
Absent an escalating trade war, he estimates the current growth path for the US economy to be around 1.5%. “However, we have revised these estimates so often recently in response to new developments that it is questionable whether it makes sense to rely on long-term economic projections.”
The Federal Reserve will leave interest rates unchanged for the next few quarters, Dowding expects. “The likelihood of rate cuts later this year is growing. In this context, we think the fair value for 2-year US Treasuries is around 4%.”
With capital market rates rising over the past week, futures markets are now pricing in just two rate cuts later this year, in line with the March dot plot. This is a significant adjustment from the four rate cuts that were priced in a few weeks ago, Dowding said.
Romania and Poland elections this weekend
In Romania, hopes that the more moderate candidate Dan is closing the gap to rival Simion have led to some recovery in financial markets. “But the most important thing is that a coalition government can be formed without the need for new parliamentary elections, which could cause more turbulence.”
