Dow Jones soars as US-China tariff cuts send markets into bidding frenzy

• The Dow Jones Industrial Average experienced a significant surge, climbing over one thousand points from the previous week’s closing levels, buoyed by the commencement of trade discussions between the United States and China over the weekend.
• As a result of these initial talks, the United States is set to reduce tariffs on imported Chinese goods to 30%, while China will correspondingly lower tariffs on goods imported from the US to 10%.
• These temporary tariff reductions are scheduled to take effect starting Tuesday and will remain in place for a period of 90 days.

The Dow Jones Industrial Average (DJIA) demonstrated a robust performance on Monday, leaping upwards by more than a thousand points and surpassing the 42,000 mark for the first time since the beginning of April. This upward momentum was fueled by substantial, albeit temporary, reductions in tariffs between the United States (US) and China. The tariff adjustments have instilled a renewed sense of optimism among investors, suggesting a potential shift in the Trump administration’s approach to trade policies. The market’s positive reaction reflects the hope that further negotiations will lead to more comprehensive and lasting trade agreements.

Markets Receive a Temporary Tariff Respite

In a move aimed at de-escalating trade tensions, both the US and China have agreed to scale back their reciprocal tariffs on imports for a 90-day period. Under the terms of the agreement, the US will maintain a baseline tariff of 10% on all goods, alongside an additional 20% tariff related to concerns surrounding the fentanyl crisis. Despite significant domestic spending on law enforcement and border security, the US administration continues to attribute a portion of the responsibility for the drug crisis to foreign governments. China, in turn, has committed to reducing its tariffs on US goods to 10% during this three-month window. Market analysts suggest that these measures, while temporary, could provide a much-needed boost to global trade and economic activity.

These tariff reductions are particularly timely, coinciding with the upcoming release of US inflation data that will reflect the initial impact of the Trump administration’s “reciprocal” tariff policies. The US Consumer Price Index (CPI) for April is scheduled for release on Tuesday, with consensus forecasts indicating a potential increase in both headline and core CPI inflation measures for the month. Year-over-year CPI is projected to remain relatively stable compared to the previous annualized period, while core CPI is expected to hold steady at 2.8% year-over-year. Investors will be closely scrutinizing these figures to gauge the effectiveness of current monetary policies and anticipate future adjustments.

Core CPI inflation has consistently exceeded the Federal Reserve’s (Fed) target rate of 2% for the past four years. Although inflation has decreased significantly from its peak of 6.6% in 2022, the Fed has faced challenges in implementing interest rate cuts as rapidly as desired by the markets. Progress in reducing inflation to the target level has largely plateaued, according to recent statements from Federal Reserve policymakers. Consequently, market expectations for a rate cut as early as July have diminished. The Fed’s cautious approach reflects concerns about prematurely easing monetary policy, which could potentially reignite inflationary pressures. The central bank is closely monitoring economic indicators and global developments to determine the appropriate course of action.

Rate Cut Expectations Delayed Further

The prevailing sentiment among rate traders now suggests that the Federal Reserve is likely to maintain its current policy rates until at least September. According to the CME’s FedWatch Tool, market participants are assigning a nearly 60% probability to the Fed holding steady in July. This represents a significant shift from the previous week, when expectations favored a quarter-point rate cut on July 30. The change in sentiment underscores the uncertainty surrounding the economic outlook and the Fed’s future policy decisions. Factors such as inflation data, employment figures, and global economic conditions will play a crucial role in shaping the Fed’s actions in the coming months.

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Dow Jones Price Outlook

The rally triggered by Monday’s tariff adjustments has propelled the Dow Jones back above its 200-day Exponential Moving Average (EMA), which is near the 41,500 level, marking the first time it has surpassed this threshold since early April. This surge has also pushed the DJIA beyond the significant 42,000 price level. The Dow has recovered approximately 16% from its low point near 36,600, which followed the sharp decline after the initial tariff announcement on April 2. However, the major equity index still needs to climb another 6% to reclaim its all-time highs above the 45,000 level. Market analysts are closely monitoring these technical indicators to assess the potential for further gains and identify key support and resistance levels.

Dow Jones daily chart