US-China crisis averted - what next?

The US and China pressed the reset button on their trade war by coming to a surprisingly conciliatory agreement over the weekend. For the next 90 days, the US will drop tariffs on China from 145% to 30% (with some strategic exclusions) and China will drop tariffs on the US from 125% to 10%. The market is interpreting this as a thawing of relations between the US and China and is assuming that the truce will be made permanent beyond the 90 days.

The deescalation of the trade war signifies a reset in global macro, and may result in the market becoming a little more boring for a while. Let’s take stock on the dominant drivers of growth and inflation in the US right now:

Trade uncertainty - headwind but improving

Yields - headwind and worsening

Demand pulled forward - was a tailwind and is now a headwind and worsening (as evidenced by yesterday’s weak CPI

Fiscal policy - tailwind and improving (more on this later)

Liquidity - headwind and no change