Softer Trade Tone Sparks Hefty Market Rally

Key takeaways

• The U.S. and UK reached a trade deal
• The Fed is facing a Catch-22
• The Bank of England cut rates again

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, shared recent trade policy developments. He also reviewed the latest decisions on rates from the U.S. Federal Reserve (Fed) and the Bank of England (BOE).

Eitelman started by noting the U.S. and the UK reached a trade agreement Thursday—the first deal struck since President Trump’s April 2 “Liberation Day” announcement. He characterized the agreement as a positive step toward lowering global trade tensions, but noted the deal is limited in scope. In addition, the UK already had the lowest reciprocal tariff rate among other countries, and the 10% baseline rate imposed by the U.S. last month will remain in place.

Meanwhile, the U.S. and China agreed to open trade talks this weekend in Switzerland. In an encouraging sign, Trump implied the United States’ 145% tariff rate on Chinese imports will likely be lowered, and said he expects the meeting to be friendly.

Eitelman said the softer tone from the U.S. on trade policy has helped boost market sentiment in recent weeks. “In another example of how fast markets move these days, U.S. stocks have fully erased their post-April 2 declines. This is why we continue to stress the importance of staying invested during volatile times,” he stated.

Pivoting to monetary policy, Eitelman noted the Fed left interest rates unchanged this week, citing extreme uncertainty over the Trump administration’s trade policy. “Chair Jerome Powell mentioned ‘uncertainty’ seven times in the press conference and the words ‘don’t know’ eight times. This underscores the challenges of forecasting in today’s macroeconomic environment,” he remarked.

The tariffs are likely to nudge the U.S. economy toward a stagflationary environment of weaker growth and higher inflation, Eitelman noted. “This puts the Fed in a Catch-22 situation when it comes to adjusting monetary policy. Raising rates would bring inflation down but cause growth to slow, while cutting rates would stimulate the economy but lead to a rise in inflation,” he explained.

In the short term, the Fed is comfortable staying on hold and monitoring how trade policy and economic data evolve before acting, Eitelman said.

The BOE, meanwhile, opted to lower rates by 0.25% on Thursday. Eitelman said the decision was split, with five of nine members voting for the cut.

“In their statement, BOE members noted they see heightened uncertainty due to trade policies as well as some downside risks to growth,” he said. Because tariffs don’t increase the inflation risk for non-U.S. economies, it’s easier for a country like the UK to cut rates when growth slows, Eitelman added.