A further de-escalation in trade tensions came this week, with the U.S. and China announcing on Wednesday that they had reached a ‘framework’ of a trade deal. That same day, Treasury Secretary Scott Bessent signaled an openness to extend the administration’s current 90-day pause on reciprocal tariffs beyond July 9th for those countries who are ‘negotiating in good faith’. While the combined announcements helped to provide a temporary lift to equity markets, a further escalation in geopolitical tensions in the Middle East on Thursday evening sent shockwaves through global financial markets, pushing the S&P 500 modestly lower on the week. Oil prices shot higher by $4.5 per-barrel, with WTI currently trading at an 18-week high of $72.5. Meanwhile, cooler readings on CPI and PPI for the month of May, alongside healthy demand in 10-and-30-year Treasury auctions helped to pressure term-yields 10-15 basis points lower on the week, with the 10-year currently sitting at 4.38%.

At this point, details of the U.S.-China trade deal remain limited. Based on what media outlets have reported, China has agreed to lift export restrictions on magnets and rare earth minerals, both of which are critical components in the production of electric vehicles, semiconductors and military equipment. In exchange, the U.S. has agreed to lift its ban on Chinese students but did not remove the export restrictions on high-end semiconductors. Moreover, the agreed framework did not alter the existing tariffs imposed by either country. As it currently stands, the U.S.  effective tariff rate on China is around 40%, well off the post-Liberation Day peak of 155%, but still elevated by historical standards. And with trade levies on most other countries sitting around 10-12%, that puts today’s U.S. effective tariff rate at around 15%, which remains an ongoing concern for investors. 

Encouragingly, broader price pressures in the economy remain subdued. May’s CPI inflation print came in on the softer side, as both goods and services prices rose by less than expected. Tariff related impacts remained minimal, though there was some evidence of price passthrough in home furnishings, recreational goods and medical supplies (Chart 1). But inflation is a lagging indicator, and with the bulk of the tariffs coming into effect between March and May, it’s still too soon to see a meaningful shift in pricing behavior. Moreover, the inventory stockpiling that occurred immediately following the tariff announcements has likely been another factor keeping the price gains at bay. 

But that doesn’t mean they’re not coming.  Over the coming months, inventory restocking will expose more firms to the tariffs, squeezing profit margins and leading to some price increases for consumer goods. Even assuming a mild passthrough to prices, where goods prices increase by just 3.5% by year-end, would likely be enough to push core measures of inflation up to the 3%-3.5% range over the coming quarters (Chart 2).

We’ll hear from the Federal Reserve next week, where it’s widely expected that they’ll keep the policy rate unchanged and continue to communicate a ‘wait-and-see’ approach. But investors will parse every word change of the statement and Powell’s press conference for signs  of whether the recent softening in inflation has nudged policymakers any closer to reducing its policy rate.