Bessent Hails ‘Productive’ U.S.-China Trade Talks Treasury secretary cites progress and promises more details Monday; Beijing says the two sides agreed to start a formal negotiation process

(…) The talks were “productive,” Bessent said, adding that the U.S. side will share more details Monday.

During the same briefing Sunday in Switzerland, Greer suggested that some sort of agreement had been reached with the Chinese side without providing specifics.

“It’s important to understand how quickly we were able to come to agreement, which reflects that perhaps the differences were not so large as maybe thought,” Greer said. He noted the U.S.’s massive trade deficit was why President Trump declared a national emergency and imposed tariffs on China and other countries. “We’re confident that the deal we struck with our Chinese partners will help us to work toward resolving that national emergency,” Greer said.

The White House issued a statement after the duo’s briefing, which was titled “U.S. Announces China Trade Deal in Geneva.” The statement included Greer and Bessent’s remarks from Switzerland, but nothing else.

The state-run Xinhua New Agency said both sides agreed to establish an “economic and trade consultation mechanism” that would involve recurring discussions. The agency said the U.S. and China would release on Monday a joint statement—a rare occurrence in recent years as bilateral relations have been strained. (…)

Bloomberg:

The US and China both reported “substantial progress” after two days of talks in Switzerland aimed at de-escalating a trade war, marking what Chinese Vice Premier He Lifeng called “an important first step” toward resolving differences. (…)

“As we say back in China, if the dishes are delicious, the timing doesn’t matter,” Chinese Vice Commerce Minister Li Chenggang, who last month was appointed trade representative, told reporters in Geneva. “Whenever it gets released, it will be good news for the world.”

Negotiators sought to convey a positive tone in separate comments to reporters, with He complimenting the US side’s professionalism and US Trade Representative Jamieson Greer suggesting trade clashes between the two sides may be overrated. (…)

Fears of empty shelves may have contributed to the urgency for the meetings, with Chinese exports to the US plummeting by 21% last month. Trump and his economic team have gotten pleas from retail executives who explained in meetings with senior officials that the result of sustained high tariffs would be pandemic-level shortages and supply-chain shocks. (…)

The US and China already have a trade deal on the books, which was signed at the end of Trump’s first term in January 2020. At the time, the president called it “historic” and said it was “righting the wrongs of the past.” (…)

• Japan’s Ishiba Says Won’t Do Trade Deal With US Excluding Autos

Japan won’t accept any initial trade agreement with the US that excludes auto tariffs, according to Prime Minister Shigeru Ishiba.

Ishiba on Monday made his stance clear when asked in parliament about the possibility that Washington might urge Tokyo to strike a provisional agreement that doesn’t address US tariffs on car imports. (…)

A local media report over the weekend indicated an agreement would likely be reached in early July around the time Japan announces a national election.

Public broadcaster NHK reported that Japan has so far proposed expanding auto-related investment in the US and enhancing cooperation in shipbuilding in an effort to reach a compromise. (…)

John Authers:

(…) the US now clearly wants an exit ramp from the tariffs it currently has in place. As there is virtual unanimity in financial markets that tariffs are a really bad idea, that is cause for celebration.

The problem is the total lack of detail about the Chinese discussions (which may be corrected Monday) and the lack of any small print in the British agreement, which is little more than a format for further dialogue. All the difficult issues, which would in pre-Trump days have been thrashed out over years in tedious negotiations at another Geneva venue, the World Trade Organization’s headquarters, lie ahead. Such arguments normally play out with minimal attention and little or no market impact. In the strange world of 2025, an agreement to enter into boring talks is reason to buy. (…)

The market base case is that the retreat is on, and the hoopla for a nothing deal with the UK indicates that the US administration is shameless. Such an approach is cynicism piled on cynicism; traders believe that Trump 2.0 never really meant its own trade rhetoric.

Cynicism is often justified. In this case, it might not be. There’s no big constituency pushing for tariffs in the US, and all the signs are that they aren’t good politics (certainly compared to culture war issues). Trump himself has been banging the drum for protectionism for decades. He is still holding out for a traumatic shift in the global trading order.

At this point, the cynics might more wisely direct their energies against the market. A base case at present might be a universal 10% tariff plus a massive levy of as high as 80% on China. Four months ago, that would have been described as a nightmare scenario. It still is. An awful lot is now riding on the administration never having meant a word it was saying. (…)

Meanwhile, the fall in inflation suggests that it has no choice but to stimulate, and do so in a big way. Headline CPI is now running very slightly negative, and the country has now swapped places with the US. While the Federal Reserve needs to be cautious about cutting rates, the People’s Bank of China does not. (…)

China’s deflation issue is most dramatic if we look at the producer price index for consumer durables, which is now deflating at an annual rate of almost 4%, the lowest in two decades. This suggests the country is swamped with products it can no longer sell to the US, while domestic demand is still insufficient to fill the gap:

The authorities have started to ease, and they have a lot further they could go. It has been their aim to wean the country off credit and ensure that China avoids its own Lehman moment, which is why it has eschewed monetary stimulus for an unusually long time since the pandemic. That gives space to expand now:

The path seems clear; China is going to have to open the taps again. That could store up more risk of financial turmoil for the future. In the present, it implies good things for both Chinese bonds and stocks. (…)

Trump Says 10% Tariff Baseline Unless ‘Exceptional’ Offer Made

President Donald Trump said that he would “always” impose a minimum 10% tariff on trading partners — before quickly adding that “there could be an exception,” underscoring the difficulty discerning the US approach to dozens of trade deals under negotiation.

“You are going to always have a baseline,” Trump said at the White House on Friday. “I mean, there could be an exception. At some point we’ll see somebody does something exceptional for us. It’s always possible. But basically, you have a baseline of a minimum of 10% and some of them will be much higher.” (…)

Hubert Marleau:

On the geopolitical front, Mark Carney, the Canadian election-victor, said that Canada will implement a trade diversification strategy, engaging with other global trade partners, strengthening relationships with reliable allies who share and uphold similar values that the world respects. He added that he intends to lead the world if the US is not willing to do the job.

His pronouncement mimics a 2018 Foreign Affair essay, written by Ivo Daalder, President of the Chicago Council on Global Affairs, and James Lindsay, Chair of the Council on Foreign Affairs, who lamented the fact that Trump was abandoning the international order that Washington had painstakingly created over 70 years.

The authors called on Australia, Canada, France, Germany, Italy, Japan, South Korea, the UK and the EU to form the “G-9,” a group dedicated to maintaining global rules “based on collective security, open markets, and democracy.” The countries included would have to learn how to work without the United States – “and, if necessary, around it”- to “supply the leadership that the Trump Administration will not.”

“The Godot Recession”?

Ed Yardeni argues that the Godot recession, widely expected but never happening, may be back in 2025.

(…) we remain believers in the resilience of the economy. It withstood the tightening of monetary policy over the past three years. We expect it will withstand this year’s tariff turmoil.

We are now lowering our odds of recession back down to 35% because we believe that China and the US both may be ready to suspend their tariffs on each other while they negotiate a trade deal. In other words, both sides may be starting to blink. Neither side can bear the pain of a trade war, which might be more painful for China’s economy than America’s economy.

On the other hand, Americans have less tolerance for pain than the Chinese.

We also expect that Trump will declare victory in his trade war with the rest of the world. By the end of the 90-day postponement period of his Liberation Day reciprocal tariffs, the US is likely to have signed numerous agreements with America’s major trading partners. Stragglers might come around during a second 90-day postponement period. Trump needs to put the trade issue behind him to reduce the odds of a recession, which would harm the Republicans’ chances of holding onto their slim majorities in both houses of Congress.

Trump also needs to get this issue resolved quickly now that numerous court cases have been filed challenging his constitutional authority to impose tariffs under his claim that they are warranted by a national crisis that he declared.

We aren’t dismissing the possibility of a recession. There could still be supply disruptions resulting from the still unresolved trade war with China. Regional and national business surveys show weakening economic activity and rising prices during March and April. Measures of consumer confidence are at recessionary levels, especially those that track consumer expectations. The latter is one of the 10 components of the Index of Leading Economic Indicators (LEI), which has been forecasting a recession since late 2022.

Meanwhile, the Index of Coincident Economic Indicators (CEI) has been rising to new record highs since then through March!

The CEI probably edged up to another record high during April. That’s because nonfarm payroll employment in private industries, which rose to a record high in April, is one of the four components of the CEI. It tends to boost two of the other components, i.e., real personal income and real manufacturing and trade sales. The fourth CEI component is industrial production, which probably declined in April along with manufacturing aggregate weekly hours, as shown in April’s employment report.

We are betting on the resilience of consumer spending, which has been boosted by the spending of retiring Baby Boomers. We had been concerned recently about the negative wealth effect on consumption because of the drop in stock prices. Now we are less concerned given the subsequent rebound in stock prices. We are also betting on business spending to remain resilient. While tariff-related uncertainties may weigh on capital spending, we expect that spending related to cloud computing and onshoring will remain strong.

Hubert Marleau agrees:

The US economy has strong internal underlyings, and is therefore capable of absorbing an-across-the-board average tariff shock of 10%, plus a mid-double-digit one on China, especially if US productivity trends in strategic industries remain advantageous.

No less an authority than the Yale Budget Lab estimates the tariffs will reduce GDP between half and one percentage point – not great, but also no recession.

As a matter of fact, many trade numbers have been exaggerated. For example, 22% of Chinese-made goods, classified as essential, are exempt from levies, and the volume of container ships departing China has fallen by 50% since mid-April; yet the activity level is still high and has remained consistent with activity seen during much of 2023. Moreover, tariffs are bound to have some domestic import substitution effect.

There is no question that tariffs are not a good idea and can be very disruptive; however, the signals for an upcoming recession are just not there, perhaps because adjustments will take place through the price mechanism and the expectation that a world-wide trade war is avoidable.

Recessions usually do not happen

• when the yield curve is not inverted (10s minus 2s is 50 bps);
• when the energy bill as a % of N-GDP is as low as it is presently (2.1%);
• when the increase is the money supply is accelerating (3.7% to 5.8%);
• when the swap market is predicting a forthcoming reduction in the policy rate of about 60 bps;
• and when the dollar becomes competitive, the DXY being down 5.0% y/y.

All of that is particularly promising as there is more optimism around China, stabilization in earnings revisions, and few headcount reductions in corporate America. (Incidentally, despite high recession expectations, the Atlanta Fed’s GDPNow model estimate for real GDP in Q2 is 2.2%, while the other NowCast model sees Q2 GDP at +1.4% and Q3 at 1.3%. Both models signal a slowdown, not a contraction.

So far, companies are not announcing large widespread layoffs and claims are not deteriorating:

Canada is already feeling it however. Canada lost more than 30,000 manufacturing jobs in April as U.S. tariffs take aim at the automotive sector and feed into economic uncertainty. Statistics Canada’s Labour Force Survey on Friday said employment increased by 7,400 nationally, though that figure was padded by an increase in election-related hiring (+37k). The overall unemployment rate rose to 6.9%, up from 6.7% in March.

Since April 3, imported cars have faced a 25% tariff on their non-U.S. content. The effect of U.S. tariffs goes beyond the automotive industry, with layoffs in the aluminum and steel sectors as well. The U.S. continues to impose 25% levies on aluminum and steel imports and on goods that are not compliant with the USMCA, plus a 10% rate on energy imports.

At the start of the year, our S&P 500 target for the end of this year was 7000. When we raised our odds of a recession on March 5 to 35%, we lowered our target to 6400. We lowered it again on March 31 to 6000, when we raised the odds of a recession to 45%.

Now that we are lowering the odds of a recession back to 35%, should we be raising our S&P 500 target back to 6400? We are inclined to do so given the power of the V-shaped rally in the S&P 500.

However, we aren’t ready to do so given the following two issues:

(1) Earnings. The outlook for S&P 500 earnings is deteriorating. Tariffs are first and foremost taxes on domestic importers. The 10% baseline tariff on all imports from most countries was announced by Trump on Liberation Day and imposed on April 5. There is also a 25% tariff on autos, aluminum, and steel. The 145% tariff on China remains in force as well.

Over the past 12 months through March, corporate tax receipts totaled $502.19 billion. The currently active tariff rates could raise over $300 billion in import duties over the coming 12 months. That would be a significant increased tax burden on corporate profits unless they are passed through to consumer prices. Some companies, such as those in the auto industry, might find that hard to do.

(2) Valuation. The valuation multiple of the S&P 500 bottomed at 18.1 on April 8. It was back up to 20.5 on Friday. It is very unlikely to bounce back to the 22.1 at which it began the year.

CONSUMER WATCH

Credit and debit card spending per household increased 1% YoY in April after a gain of 1.1% YoY in March, according to Bank of America aggregated card data. Seasonally adjusted (SA) spending per household was flat month-over-month (MoM), with the seasonally adjusted annualized growth rate (SAAR) remaining at 1.6% again for April.

Reading the consumer is particularly tricky this year. In the chart above, I focus on the monthly trend (red line) which show that spending growth has stalled in April in spite of a late Easter. Also consumers front loaded some durables earlier this year.

Importantly, we also must factor in the 14% YoY decline in gas prices, likely to drop further in coming weeks. This is considerably helping mid-lower income Americans and could sustain discretionary income when tariffs start to bite.

• Pre-Tariff Car Buying Frenzy Leaves Americans With a Big Debt Problem Consumers who raced to replace their vehicles because of Trump’s trade policies risk a costly financial hangover that could last years.

(…) In March, Honda Motor Co. recorded a 13% jump in US sales, while Nissan Motor Co. said volumes rose 10%. The US annual selling rate—which extrapolates an entire year’s sales from a monthly pace—came in at 17.8 million in March and 17.3 million in April. Last year about 16 million new cars were purchased in America.

But this frothy auto market will likely leave some buyers with a financial hangover, especially since there already have been signs that more car buyers are missing payments. Delinquencies on auto loans have been rising, and car repossessions spiked to 2.7 million last year, almost double the rate of repos in 2021, according to the Recovery Database Network. Despite an average new-car loan rate of more than 9%, banks this spring began extending more loans to subprime buyers, according to researcher Cox Automotive. At the same time, prices remain stubbornly high, with average monthly payments for a new vehicle costing $734 in March, up about 27% since early 2020, according to automotive researcher Edmunds.com Inc.

To cope, new-car buyers have been extending the length of their loans, with one in five now taking out a seven-year note, Edmunds says. That’s likely to leave more owners upside down on their loans. One-quarter of trade-ins now are worth less than what’s owed on the loan, a situation known as negative equity. (…)

Nothing too serious yet:

GOP Tax Bill Seeks to Put Cash in Taxpayers’ Pockets in Early 2026 Proposal boosts standard deduction, increases maximum child tax credit

The bill released late Friday would increase the standard deduction by $1,000 for individuals and $2,000 for married couples starting in tax year 2025, above and beyond the Trump tax cuts’ expansion of that basic level where income taxes don’t apply. The standard deduction is currently $15,000 for individuals and $30,000 for married couples.

The maximum child tax credit would increase to $2,500 from $2,000, also starting this year. Those changes would mean that many taxpayers who don’t change their withholding would see larger-than-expected refunds in spring 2026. For a middle-income married couple with two children in the 12% tax bracket, that means a $1,240 tax cut for tax year 2025.

In addition, the proposal from the House Ways and Means Committee adds an extra inflation adjustment to tax brackets for tax year 2026—a benefit that would show up in smaller paycheck withholding in January.  (…)

Friday’s bill is incomplete and will likely be changed substantially before the committee vote. It is silent on some of the issues that are dividing Republicans, including the cap on the state and local tax deduction and the fate of clean-energy tax credits that Democrats created in 2022. It doesn’t include the tax-rate increase for the highest-earning Americans that Trump has been floating in recent days. (…)

Democrats are expected to oppose the bill. They argue that the tax-cut extensions give too much to upper-income households and warn that middle-income Americans would be hurt by the GOP plan’s expected Medicaid cuts and by Trump’s recent tariffs.  (…)

The bill also includes few of the potential tax increases that Republicans have been considering, and has no mention of such ideas as higher taxes on university endowments, limits on deductions for executive pay and caps on businesses’ ability to deduct state and local taxes. It doesn’t yet include versions of Trump’s desired proposals, such as faster write-offs for factory construction projects and removing taxes on tips, overtime pay and Social Security benefits.

The bill does include a permanent extension of higher estate-tax exemptions, setting that at $15 million per person in 2026 and indexing it to inflation. It would also permanently extend the deduction for certain closely held businesses that pay taxes through their owners’ individual returns, boosting that break to 22% from 20% while changing some rules. The top tax rate on that income from closely held businesses would drop to 28.9% from 29.6%. Multinational companies would avert tax increases on certain foreign profits and some income from U.S. exports.

The plan also retains some key limits on deductions that Congress created in 2017, such as a rule that caps at $750,000 the amount of mortgage debt that can generate deductible interest. It would permanently repeal miscellaneous itemized deductions, such as legal fees and unreimbursed business expenses. Moving expenses in most cases would remain nondeductible. (…)

China’s Consumer Deflation Extends as Tariffs Take Toll

The consumer price index fell 0.1% from a year earlier, the National Bureau of Statistics said Saturday, similar to the drop in the previous month. It also matched the median forecast of economists surveyed by Bloomberg.

Factory deflation persisted for a 31st month, with the producer price index recording a decline of 2.7% compared to 2.5% in March. (…)

EARNINGS WATCH: +16.1%!

From LSEG I/B/E/S:

450 companies in the S&P 500 Index have reported earnings for Q1 2025. Of these companies, 75.8% reported earnings above analyst expectations and 19.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 77% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 6.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.8%.

Of these companies, 61.9% reported revenue above analyst expectations and 38.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated revenue growth rate for the S&P 500 for 25Q1 is 4.9%. If the energy sector is excluded, the growth rate improves to 5.3%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 14.1%. If the energy sector is excluded, the growth rate improves to 16.1%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 6.3%. If the energy sector is excluded, the growth rate improves to 8.0%.

Another amazing corporate quarter. +16.1% earnings growth on revenues up 5.3%. Profit margins expanded by 111 bp to 12.1% to reach the highest level since 2Q 2022.

Energy EPS fell 16.6% as Brent dropped 8% on average during the quarter, helping non-energy margins.

Trailing EPS are now $251.52, up 4.0% from January while forward EPS at $270.96 are down 0.7% from January.

We had 25 pre-announcements last week, 9 positive and 15 negative but the ratio of negative to positive has improved vs at the same time after Q1.

Goldman Sachs:

The elevated level of uncertainty has also been reflected in management guidance. Companies were less likely than usual to guide full-year EPS higher (26% vs. 41% average) and more likely to maintain full-year guidance (58% vs. 41% average), and many companies that maintained guidance did not incorporate the impact of tariffs

Our economists maintain an estimated 45% probability of US recession during the next 12 months. Despite this risk, resilient recent earnings and economic data alongside incrementally positive tariff developments have caused the market to focus squarely on the optimistic modal outlook of continued growth. The result is a surprisingly tight equity risk premium, with the S&P 500 trading at a current forward P/E of 21x on unrealistically inflated consensus EPS estimates.

During the next few months, however, economic data are likely to deteriorate, and investors will need to grapple with a meaningful deceleration of earnings growth that is likely to occur in coming quarters.

We think it will be hard for stocks to rally significantly in the short-term against this backdrop. Ultimately, however, the avoidance of an economic recession, increasing confidence in EPS reacceleration in 2026, and insurance cuts by the Fed later this year should drive continued US equity gains during the next 12 months.

We expect 3% EPS growth to $253 in 2025 (vs. 7% bottom-up and 4% top-down consensus) and 6% growth to $269 in 2026 (vs. 14% bottom-up and 11% top-down consensus). At the sector level, our 2025 S&P 500 EPS estimate reflects weakness in cyclical sectors offset by strength in Info Tech and Comm Services. The bottom-up consensus expects 50 bp of margin expansion to this year 12.1%, which we view as too optimistic.

1Q operating results also showed a reacceleration in mega-cap tech earnings growth relative to the rest of the market. The Magnificent 6 (excluding NVDA, which reports on May 28th) beat consensus EPS estimates by 16% in aggregate and sales estimates by 1%.

Bottom-up consensus expects the difference between earnings growth for the Magnificent 7 and the S&P 493 to narrow from 32 pp in 2024 (36% vs. 4%) to 10 pp in 2025 (15% vs. 5%) and just 2 pp in 2026 (15% vs. 13%). However, YTD consensus 2025 EPS revisions continue to be more negative for the S&P 493 than the Magnificent 7 (-4% vs. 0%).

The mega-cap tech stocks also signaled a continuation of the AI capex cycle. META increased the guided capex range for 2025 to $64 – $72 billion from the previously announced $60 – $65 billion range, mostly geared toward generative AI and core business needs. GOOGL reiterated prior guidance of $75 billion of capex in 2025 aimed at alleviating supply constraints against elevated demand for computing capacity and broader AI initiatives.

We forecast capex will remain the largest use of cash for the S&P 500 in 2025 ($1.2 trillion, 9% growth) driven by the hyperscalers. In contrast, capex growth for the median S&P 500 stock will likely be subdued due to economic uncertainty and slowing earnings growth. Soft data show a meaningful slowdown in capex expectations, and capex revision breadth has recently deteriorated.

• Earnings Revision (losing) Momentum:  Analysts have already made up their minds, earnings revisions momentum has plunged (this combines the signal from earnings revisions ratios and short-term forward earnings rate of change). Now some of this might just be sentiment; analysts are people too, they get it wrong, they react to news and market movements, they move after the fact… But either way there is a clear shift underway here. (Callum Thomas)

Source:  Topdown Charts Professional

QUIET BORDERS

Quiet illegal and legal crossings

• Air Canada bookings to U.S. decline by ‘low teens’ amid trade tensions, CEO says

Note: I am travelling until mid-May. Postings will be irregular.

Trump Stages a Trade-War Retreat Markets cheer as the U.S. strikes a deal with the United Kingdom.

The WSJ Editorial Board:

President Trump continues to walk back his trade war by degrees, and markets continue to cheer. That’s the big story in Thursday’s announcement that the U.S. and the United Kingdom have struck a new trade deal.

Many details need to be worked out, but the deal marks another step back from Mr. Trump’s “liberation day” tariffs of April 2. The President and his advisers promised no exceptions at the time, but the markets staged a revolt. Mr. Trump then offered a 90-day reprieve to everyone but China to negotiate deals that pull the U.S. and the world back from the trade-war abyss. (…)

The deal as outlined Thursday looks like progress, as far as it goes. Britain is still stuck with Mr. Trump’s new 10% tariff on all imports from all countries. But it will now be spared higher industry-specific tariffs on steel (25%) and cars (27.5%). The car rate will fall to 10% for the first 100,000 vehicles Britain ships to the U.S. each year—a quota that happens to be roughly the number of sales. The U.S. tariff on British metals will fall to zero.

In exchange, Britain will lower its barriers on imports of American ethanol, and its airlines will buy Boeing jets worth $10 billion. The two sides also agreed to expand reciprocal trade in beef products.

It appears the deal won’t reduce Britain’s health-and-safety standards for American beef, which has long been U.S. ranchers’ main sticking point. Also left out is Britain’s ban on imports of American chicken that’s been disinfected in a chlorine wash, despite the lack of any health risks. Negotiations on chickens and other trouble spots such as trade in digital services and taxes on U.S. tech giants will continue, as they’ve done for some time.

But the details here matter less at the current moment than the direction of U.S. trade policy, as the buoyant market response recognizes. A month ago the world looked to be on the edge of potential 1930s-style trade meltdown.

That seems less likely now. Mr. Trump is promising many more trade deals to come, as he tries to execute a retreat from his tariff morass. And credit to Mr. Starmer for recognizing the opportunity and offering the President an exit he can boast about. Other national leaders can take that lesson.

Mr. Trump and his protectionist chorus will say this was the plan all along, as if a flight from the dollar and U.S. equities and a surge in bond yields were anticipated. The President likes tariffs for their own sake, which is why he made his April 2 announcement. But the looming economic damage has proven to be too risky to be politically sustainable. If Republicans want to pretend this retreat is genius at work, fine with us as long as the damage is reduced.

Not that this is the end of the trade harm. The U.S. still has to negotiate deals with countries that may be more resistent to avoid more tariff mayhem when the 90 days expire. The biggest question concerns China and the looming shutdown in most two-way trade.

Mr. Trump has already given exceptions to Apple and other tech companies. But that won’t fill empty retail shelves, or help small businesses that can’t get critical components. It’s no surprise that the White House was leaking on Thursday that Mr. Trump might reduce his 145% tariff on Chinese goods to 50% by next week. More good news for markets.

Mr. Trump still has a long way to go to mitigate the harm from his tariff barrage, and some of it will be permanent in the form of higher border taxes and prices. But the British deal offers a template for a partial face-saving exit, if Mr. Trump will take it.

• Trump’s Bespoke Trade Deal With U.K. Sets Little Precedent for Other Nations Many other agreements weren’t seen as likely to come together quickly

(…) In a sign of how eager Trump was for a win in the trade conflicts, he called U.K. Prime Minister Keir Starmer late Wednesday to finalize the details. Starmer was watching his favorite soccer team, Arsenal, play a crucial European game at the time, according to the prime minister, who said he hadn’t planned to announce a trade deal on Thursday.

“They are keen to show they are making progress,” said Myron Brilliant, a senior counselor at DGA Group. “These are signals to the market. It’s better to have a step forward than a step back. But they are going to have to demonstrate these deals are going to end up with sustaining commitments on both sides.” (…)

“One lesson from the U.S.-U.K. announcement is that all of America’s trading partners are likely to face at minimum a 10% tariff,” said National Foreign Trade Council President Jake Colvin. “That alone would result in a permanent fourfold increase from the average U.S. tariff of 2.4% in 2024, which is a scenario that was nearly unthinkable just a year ago.” (…)

For Chinese officials, what’s notable in the limited deal Trump struck with the U.K. is that it doesn’t appear to have any details about the two countries aligning to isolate China—a stated goal by Trump advisers for the administration’s trade negotiations with various nations. (…)

• Britain’s trade deal with Trump may not be good news for the world

The FT’s Allan Beattie:

“How much legal structure will this deal have?” a trade lawyer at a prominent firm asked me yesterday, gesturing at the detritus of a meeting on the conference table in front of him. “About the same as this napkin.”

Not even the architects of the trade deal announced between the US and the UK would call it a thing of economic or legal beauty. Seemingly without even a signed document — and designed purely to escape the tariffs that Donald Trump imposed on steel and cars — the pact is closer to a protection payment to a mob boss than a liberalising agreement between sovereign countries.

Whether the deal is politically worth it is a calculation only Sir Keir Starmer’s UK government can make. Certainly it didn’t grant US exporters a huge amount more access to the UK market. But whatever short-term benefit it has given to the UK, it hasn’t done a whole lot for the integrity of the global trading system. (…)

Meanwhile, the most important risk is not to the UK itself but the global trading system. Part of the deal involves reducing protection on imports including ethanol and beef from the US but not from other countries, despite this not being a formal legal trade agreement. The UK has thus undermined the “most favoured nation” principle that underlies the multilateral trading system.

Officials strain credibility by claiming it’s compatible with World Trade Organization rules as part of a broader package. If other countries want to kick up a fuss, a WTO dispute settlement hearing may soon be sorting that one out. By accepting that it will continue to face the 10 per cent baseline tariff, the UK has also normalised a deeply regressive move.

Goldman Sachs: (my emphasis)

President Trump announced a preliminary trade deal with the UK that leaves in place the US 10% baseline tariff but scales back sectoral tariffs on autos and steel/aluminum, and appears to lay the foundation for preferential treatment for the pharmaceutical tariffs the Trump administration is considering.

The deal appears to reduce UK tariffs on certain agricultural products (e.g., beef, ethanol) from the US, and also exempts UK aerospace parts from US tariffs. Together, these changes look like they would reduce the US effective tariff rate by less than 0.1pp.

In comments during the announcement, President Trump also took a much more conciliatory tone on the US-China talks, saying “Who made the first call, who didn’t, it doesn’t matter. It only matters what happens in that room, but I will tell you that China very much wants to make a deal.”

He also expressed optimism, saying “I think we’re going to have a good weekend with China.” We have expected the US and China to remove the retaliatory tariffs relatively soon—likely in the next few weeks—leaving a still-substantial tariff increase of 54pp and 34pp respectively.

While the UK deal and China comments both suggest tariff de-escalation, President Trump also suggested for the second time this week that he might reintroduce higher country-specific tariff rates in the near future: “there’ll be a time…where we’re just going to make the deal…we don’t need the country involvement because we’ve already had it. And we’ll say this particular country which had big surpluses…is going to pay a 25% tariff or a 30% or a 50% or 10% or whatever it may be.”

While we do not expect the “Liberation Day” tariff rates to take effect at the end of the 90-day pause, it appears increasingly likely that some if not most trading partners will soon face a renewed threat that country-specific rates will take effect, and points to a higher chance that the US might impose those rates on at least a few trading partners.

Ed Yardeni:

President Donald Trump will need to declare victories in his trade wars with multiple countries around the world sooner rather than later. He and his fellow Republicans have to avoid a recession caused by his tariff wars. Otherwise, they risk losing their thin majorities in both houses of Congress later in 2026. In addition, court cases are piling up that challenge the President’s legal authority to declare a crisis to justify his tariff hikes. In the event that the courts rule that Trump’s tariffs are unconstitutional, he still could declare that he won the trade wars and so doesn’t need tariffs anymore.

(…) negotiating trade treaties and implementing them can’t be done in 90 days. But odds are that there will be multiple trade agreements in principle by the deadline and that another postponement period will be declared for the stragglers.

The stock market will soon have deals fatigue and tire of Trump’s declarations of victory. We think the trade issue will be behind us by July or August. If so, then the focus should be on how much Trump’s tariff skirmishes weighed on the economy and earnings. We expect both will remain surprisingly resilient.

Contributing to today’s stock market rally was the latest weekly unemployment insurance claims report. It confirmed that the labor market remains resilient. It isn’t showing any cracks from Trump’s Tariff Turmoil. Initial jobless claims fell back to 228,000 during the May 2 week. (…)

It’s no surprise that nonfarm business productivity dropped by 0.8% (saar) during Q1 given that real GDP fell 0.3% during the quarter while labor hours increased. We view this as a temporary disruption related to Trump’s Tariff Turmoil, which shows signs of ebbing. We’re still betting on a Roaring 2020s scenario over the rest of the decade, with technological innovations boosting productivity and real economic growth while keeping a lid on inflation.

• Trade War Has Much Bigger Negative Impact on the US (Apollo)

The IMF just released their latest World Economic Outlook, and comparing their pre-tariff forecast from January with their forecast today shows that they expect the trade war to have a much bigger negative impact on the US economy than on other countries, including China, see chart below.

Sources: IMF, Apollo Chief Economist

BTW: Trump’s tricky numbers (Axios)

President Trump’s net job approval rating has dropped seven points since April 15, according to The Cook Political Report’s new poll tracker.

Trump has taken big hits from young voters, Latinos, and independents — three key groups that helped propel him to the White House.

“Continuing to track the president’s approval among the coalition groups that propelled him to victory in 2024 will give us a strong indication of whether those voters will show up next year to support Republicans not named Donald Trump,” CPR’s Carrie Dann writes.

The shift was -11.8 points for 18-to-29-year-olds — the biggest drop of any group.

For Latinos, Trump’s net rating dropped 10.4 points.

For independents, it was a net drop of 7.9.

Toyota Says Tariffs Will Erase $1.3 Billion in Profits in Just 2 Months The automaker’s somber forecast for the fiscal year underscored how quickly fortunes had turned for many companies reckoning with President Trump’s tariffs.

(…) Toyota’s remarks on Thursday suggested a challenging period ahead for the Japanese auto industry as a whole, particularly because most analysts consider Toyota to be among the Japanese carmakers least vulnerable to Mr. Trump’s tariffs.

Of the more than 2.3 million vehicles Toyota sells annually in the United States, only around 500,000 are exported from Japan. And despite the tariff blow to profits, the company forecast that its sales in North America would rise this fiscal year by 237,000 units.

Smaller Japanese automakers such as Mazda and Subaru sell a significantly higher proportion of imported vehicles in the United States, while Mitsubishi Motors does not have any factories in the country. Japan’s second- and third-largest automakers, Honda and Nissan, are set to announce fiscal year earnings next week. (…)

Chinese Exports to US Slump 21% But Soar to Rest of Asia, Europe

Total exports expanded 8.1% last month, above the 2% increase forecast by economists. Imports fell 0.2%, leaving a trade surplus of $96 billion, according to data from the customs administration Friday.

Shipments to the US fell 21% after the imposition of tariffs in early April, while those to the 10 Southeast Asian nations in the Asean group rose 21% and exports to the European Union were up 8%. (…)