Too Soon to Breathe Easy

Major Issues Remain Unresolved

US equity markets have made up all their losses since April 2 — “Liberation Day.” Indications of a possible thaw in US - China trade relations, better than expected jobs numbers for April, and healthy tech company earnings contributed to calming the waters. These positive developments do not mean, however, that the financial storms that caused the post-April 2 equity plunge are in the rearview mirror.

President Donald Trump and his top economic officials aappear interested in ratcheting down tensions in trade relations as the sky-high tariffs — especially the 145% levy on Chinese products — soured US consumer sentiment and contributed to expectations of much higher inflation in coming months and years. Some electronic items vital to the United States got a reprieve from Trump’s China tariffs and that had led to some optimism in markets. On the Chinese side, although some essential items such as US medicines got relief, officials appear to have dug in on offering further concessions.

Despite repeated statements by President Trump that he was imminently expecting a call from President Xi Jinping, the Chinese leader appears not to have made contact since Liberation Day. Although Trump claimed that Xi had called him, Treasury Secretary Scott Bessent would not confirm such a development! And Chinese officials put out a statement yesterday that although they are willing to conduct talks, the United States would have to first desist from “extortion and coercion.” Negotiations appear to be at a stage where talks are about whether to have talks.

Although the Chinese economy is hurting, President Xi continues to be the undisputed leader of China and does not have to face mid-term elections as President Trump and the Republican party have to!

On the jobs front, the US economy generated 177,000 nonfarm jobs last month, far higher than consensus expectations. This was a respectable figure and boosted equities and the 10-year Treasury yield Friday despite the downward revisions in the February and March employment numbers. But the healthy jobs figure does not mean, however, that the economy has surmounted the impact of tariffs. Such levies usually take several months to take full effect, and the impact on inflation and jobs is likely to be manifested in the second half of the year.

The jobs data also pushed Trump to nudge the Federal Reserve yet again in public. “NO INFLATION, THE FED SHOULD LOWER ITS RATE!!!” the President posted on Truth Social yesterday. Expect more fireworks next week. The strong employment situation will only result in the Federal Open Market Committee deciding next Wednesday to hold rates, and in Federal Reserve Chairman Jerome Powell reiterating that stance at his press conference. Neither move would make Trump happy!

After having long insisted that his focus is on lowering the 10-year Treasury yield rather than the Federal Funds rate, Secretary Bessent jumped into the fray to discuss what the FOMC should do next week. He noted that the two-year Treasury yield is below the Federal Funds rate. "That's a market signal that they think the Fed should be cutting," he told Fox Business on Thursday.

Despite his years of experience in the financial sector, Bessent is wrong. What the low two-year Treasury yield suggests is that the Fed is likely to lower rates soon rather than that it ought to. The level of the two-year yield, rather than provide a prescription for Fed policy, is merely a reflection of the collective belief of investors as to what the central bank is expected to do in the near future. That the market has a built-in expectation for the Fed to ease policy during one of the forthcoming meetings despite inflation being on the uptick is a warning for Powell rather than a prescription.

And that provides a key decision for Powell to make, as SriKonomics has suggested repeatedly in past issues: Will he follow the path laid out by Paul Volcker as Chairman of the Federal Reserve to strangle inflation, or that of a predecessor, Arthur Burns, who let inflation get out of hand?

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

May 3, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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