Trump’s Tariff Pause With China Spurs Market Rally, But Inflation Concerns Remain

TLDR:

US and China agreed to scale back tariffs for 90 days, triggering a market rally April CPI report (due May 13) expected to show first signs of tariff-related inflation Stock futures indicating market pullback after Monday’s gains Full impact of tariffs on inflation may take months to materialize Federal Reserve waiting for economic data before adjusting monetary policy

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The US stock market experienced a major rally on Monday after the United States and China announced a deal to scale back tariffs for 90 days. The agreement sparked optimism among investors, with the Dow Jones Industrial Average exiting correction territory and the Nasdaq entering a new bull market.

Futures for major indices indicated a pullback on Tuesday morning, as investors took profits following Monday’s stellar gains. Dow futures slipped 96 points (0.2%), while S&P 500 and Nasdaq 100 futures both fell 0.4%.

E-Mini S&P 500 Jun 25 (ES=F)

The tariff reduction announcement comes after weeks of market uncertainty following President Donald Trump’s “Liberation Day” tariff announcement. Initially, Trump had imposed broad tariffs, but quickly pivoted a week later to announce a 90-day pause on tariffs for all countries except China, maintaining a 10% baseline duty.

Inflation Data in Focus

Tuesday’s Consumer Price Index (CPI) report, set for release at 8:30 a.m. Eastern time, is expected to show the first signs of inflationary impacts from Trump’s tariffs. Economists forecast headline annual inflation to hold steady at 2.4% in April, with a month-over-month increase of 0.3%.

Core inflation, which excludes volatile food and energy prices, is expected to remain at 2.8% on an annual basis while rising 0.3% month-over-month. This would represent an increase from March’s 0.1% monthly gain.

UBS chief economist Jonathan Pingle noted, “We expect the first signs of tariff related inflation to show up in the April CPI released on Tuesday.”

Bank of America senior US economist Stephen Juneau told Yahoo Finance that these initial tariff impacts will likely be concentrated in specific sectors. “It’s probably the first month where we get a little bit of signs that we’re seeing the impact of tariffs, and it’s not going to be broad-based. It’s probably more concentrated in autos.”

Market Outlook Remains Cautious

Despite the positive reaction to the US-China deal, market experts remain cautious about long-term prospects. Deutsche Bank macro strategist Jim Reid said in a research note, “There’s little doubt about how positive this news is, but the U.S. is not out of the woods yet.” He added that current tariff rates are likely “consistent with a subdued, barely positive, level of US growth” over the second half of 2025.

The yield on the 10-year US Treasury note edged down to 4.463% on Tuesday. The US Dollar Index was also down 0.2% as investors assessed the implications of the trade news.

Economists point out that the full effects of the tariff policies may not be visible in economic data for several months. The recent pause in tariffs with China should limit some potential increases to inflation, but the overall trend is still expected to be higher.

Federal Reserve Chair Jerome Powell emphasized in a recent press conference that the central bank is waiting to see actual economic data before making policy changes. “The risks of higher unemployment and higher inflation have risen, but they haven’t materialized yet. They really haven’t. They’re not really in the data yet… Our policy’s in a very good place, and the right thing to do is await further clarity.”

Some market strategists believe that Tuesday’s CPI data may not significantly impact the recent market rally. Citi head of US equity trading strategy Stuart Kaiser suggested that the recent tariff pause will likely give incoming economic data a “hall pass” from investors.

After six weeks of market disruption caused by President Trump’s initial tariff announcement, the effects are expected to become more apparent in the upcoming earnings season, which begins in July.

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