US-China Deal: Tactical Pause, but Tariffs Are Here to Stay
Last Monday, the U.S. and China struck a surprise deal to slash tariffs and pause their escalating trade war. U.S. duties on Chinese goods will drop from 145% to 30%, while China will cut its retaliatory tariffs from 125% to 10%. The 90-day truce, announced after talks in Geneva, is intended to give both sides breathing room and avoid full economic decoupling. The tariff framework remains largely intact, and the language coming out of Washington suggests that tariffs are no longer just a negotiating tool, they’re becoming a permanent tool of U.S. trade strategy. The administration continues to frame them as essential for protecting domestic industries, securing supply chains, and reinforcing national resilience. Even with the temporary reductions, the message is clear: tariffs are here to stay.
Markets rallied on the news: the S&P 500 and NASDAQ rose by 3.3% and 4%, respectively, while the dollar strengthened by more than 1% on the day. U.S. Treasury yields moved higher, reflecting improved growth expectations. However, the deal leaves key structural issues unresolved.
US and Europe: Inflation Cooling
U.S. CPI cooled to 2.3% in April, its lowest since early 2021, led by airfares (-2.8%), internet services (-1.5%), and used cars (-0.5%). PPI surprised to the downside, falling 0.5% month-over-month, signaling easing upstream pressures. These two prints combined led to a revision to the downside for expectations in core PCE. Initial jobless claims held steady at 229,000 and in line with what consensus was expecting, pointing to continued labor market resilience. Retail sales disappointed, up just 0.1% after a tariff-driven surge in March. Long-end rates edged down on the day, while equities rallied as data hinted at disinflation, but growth momentum may be fading as tariffs bite. Markets are now expecting the FED to keep rates steady at the next meeting, as risks of recession can be taken out for the moment.
In April, CPI rose 0.5% in France, driven by services and food, while energy declined; 0.6% in Spain, with increases in clothing, leisure, and hospitality; and 0.4% in Germany, supported by food and services, with energy falling. The ECB’s dovish message remains intact, but external developments are complicating the outlook. Markets are currently pricing in two more cuts in 2025, with a June cut seen as highly likely, currently priced in with a 90% probability.
US Fiscal Outlook: Debt Back in Focus
In the coming weeks and months, attention is likely to shift toward the U.S. fiscal trajectory. The federal deficit is projected to exceed $2.1 trillion this year, with debt-to-GDP on track to reach 130% by 2034. While much of the fiscal strain stems from structural imbalances, the 2017 Tax Cuts and Jobs Act (TCJA) plays a significant role. The TCJA slashed corporate taxes from 35% to 21% and introduced major individual tax cuts, many of which are set to expire after 2025.
President Trump is now pushing to make those cuts permanent and introduce further reductions, particularly on capital gains and corporate income. These proposals could add another $3–5 trillion to the deficit over the next decade. Although the bill is unlikely to pass before August, markets are already beginning to price in a higher deficit. Last week, 20-year Treasury yields approached 5%, reflecting growing concerns over long-term fiscal sustainability.
Algebris Investments’ Global Credit Team
For more information about Algebris and its products, or to be added to our distribution lists, please contact Investor Relations at algebrisIR@algebris.com. Visit Algebris Insights for past commentaries.
Any opinion expressed is that of Algebris, is not a statement of fact, is subject to change and does not constitute investment advice.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris Investments, its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
© Algebris Investments. Algebris Investments is the trading name for the Algebris Group.
