The reaction from financial markets was swift and strong. Equities surged on the day of the announcement, with major US stock indices posting their largest daily gains in months. The Dow Jones rose 2.8%, the S&P 500 climbed 3.3%, and the Nasdaq jumped by 4.4%. The rally was not limited to the United States, as markets in Europe and Asia also followed suit, reflecting global relief over the temporary pause in trade tensions. Investors embraced a risk-on sentiment, encouraged by the prospects of renewed trade flow and a break from the uncertainty that has overshadowed global growth forecasts.
However, the backdrop of this rally was complicated by softer-than-expected inflation data in the United States. Headline inflation declined slightly in April, falling to 2.3% annually from 2.4% in March. Month-on-month, the consumer price index rose only 0.2%, undershooting expectations. Core inflation, which excludes volatile energy and food prices, held steady at 2.8%. A similarly soft producer price index reading followed, further reinforcing signs that inflationary pressure may be waning. The data suggested that despite higher tariffs, consumer prices were not yet reflecting the increased import costs, potentially due to delayed pass-through or corporate absorption of costs.
The combination of a tariff truce and subdued inflation sparked fresh speculation that the Federal Reserve could be inching closer to a rate cut. While the central bank has signaled patience in its approach, markets interpreted the latest economic readings as a sign that there may be room for monetary policy easing if growth continues to moderate and inflation fails to accelerate. The conversation around interest rate adjustments gained traction, especially as investors assessed the potential lag between trade policy impacts and broader price levels.
The US dollar experienced heightened volatility throughout the week. Initially, the dollar strengthened on optimism surrounding the trade agreement, but it reversed course following the inflation release. The currency weakened as traders began to price in a more dovish policy stance from the Federal Reserve. In currency markets, the dollar’s decline was most evident in Asia, where the USD/JPY pair fell for four consecutive sessions. Although the euro also softened against the dollar due to shifting capital flows, the longer-term trend for the dollar appears tied closely to evolving inflation trends and Federal Reserve policy signals.
Beyond monetary and market dynamics, the 90-day truce includes broader commitments. China has agreed to suspend or eliminate a range of non-tariff measures that had been enacted since early April, including export controls on strategic minerals essential for manufacturing and technology production. This move has implications for global supply chains and could provide relief to industries previously hit by export restrictions.
The scale of the rally and the strong market reaction underscore how central trade policy has become in driving global sentiment. With tariff levels reset significantly lower—by 115 percentage points on the US side and 115 points on the Chinese side—the short-term boost is undeniable. Analysts noted that the last time such a dramatic market reversal occurred within a comparable time frame was over four decades ago.
Nevertheless, caution remains. The 90-day window is, by nature, temporary. While this agreement offers immediate relief, there is uncertainty about what may follow once the truce expires. Past cycles of negotiation and breakdown have taught investors to remain vigilant. Economic data over the coming months will be critical in determining whether the de-escalation leads to longer-term policy shifts or if it represents a brief detour from a broader confrontation.
For now, the global economy gets a respite. Equity markets are reflecting optimism, the dollar is recalibrating, and central banks are watching closely. The next phase will depend on how effectively both sides capitalize on this reset to forge more stable trade relationships and how inflation and growth data influence policy decisions in the months to come.
