Stocks crumbled on China’s reciprocal tariffs nuke on the US

·       The market is now worried about escalating trade war tensions and synchronized global recession; oil and industrial metals slumped

·       But Trump is already sounding soft and may blink first; there may be reconciliations soon rather than protracted confrontations

·       Most of the major US trading partners including China, EU may also show flexibility to avoid an all-out trade war with the US

·       Gold slid on hawkish Powell and as Trump may monetize (sell) a part of US Gold reserve to bring down US debt

In his Tariff Liberation Day event speech, Trump clearly warned trading partners about retaliatory tariffs in response to his reciprocal tariffs. But on Friday, April 4, 2025, as highly expected, China struck back in response to Trump trade war 2.0 and announced significant retaliatory measures in response to President Trump's reciprocal tariffs. These actions mark a substantial intensification of the ongoing trade war between the US and China. China hits back first and then talks. Trump will now invite his 'close friend' Xi for a talk urgently.

China's Retaliatory Measures on April 4, 2025, in response to Trump’s reciprocal taxes:

·       A 34% Tariff on ALL U.S. Imports: Effective April 10, 2025, China will impose a 34% tariff on all U.S. imports. This decision mirrors the U.S.'s recent 34% tariff on Chinese goods, which was in addition to a prior 20% levy, bringing the total U.S. tariffs on Chinese imports to 54% since the beginning of Trump's second term.

·       Export Controls on Rare Earth Materials: China has implemented export controls on critical rare earth elements, including samarium and gadolinium, essential for high-tech industries and defense applications. According to China's commerce ministry, these measures aim to safeguard national security and also fulfill international obligations. China to impose export controls on samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium, virtually used in every tech space.

·       Suspension of U.S. Agricultural Imports: Imports of chicken from two U.S. suppliers, Mountaire Farms and Coastal Processing, have been suspended due to the detection of a banned drug in shipments.

·       China Adds 11 US companies to the unreliable list

Statements from Chinese Officials:

China's Ministry of Foreign Affairs criticized the U.S. actions as unilateral and in violation of World Trade Organization (WTO) rules, accusing the U.S. of destabilizing the global economic order. China has also filed a lawsuit with the WTO over the new U.S. tariffs.

Global Trade Disruptions and Escalating Trade War Tensions:

The EU and other global major economies have expressed concern over the escalating trade war, with some countries seeking to negotiate exemptions or mitigate the impact on their industries.

The US Position:

President Trump defended his Liberation Day reciprocal tariffs as a "Declaration of Economic Independence," asserting that they are intended to boost U.S. manufacturing and jobs. Treasury Secretary Scott Bessent urged other countries to refrain from immediate retaliation to prevent further escalation.

As of April 4, 2025, China has implemented retaliatory tariffs in response to President Trump's reciprocal tariff plan, which was announced earlier this week. On Wednesday, April 2, 2025, Trump unveiled a sweeping tariff strategy, imposing a baseline 10% tariff on goods from all countries, with additional "reciprocal" tariffs targeting specific trading partners based on perceived trade imbalances.

For China, this included an additional 34% tariff on top of existing 20% duties, bringing the total tariff rate on Chinese imports to 54%, effective April 9, 2025. This move aligns closely with Trump’s campaign promise of a 60% tariff on Chinese goods and marks a significant escalation in the U.S.-China trade war.

In response, China announced its retaliatory measures on April 4, 2025. The Chinese Ministry of Commerce imposed a ‘reciprocal’ retaliatory tariff of 34% on U.S. imports, mirroring the U.S. increase. These tariffs target a wide range of American goods, including agricultural products such as chicken, wheat, corn, cotton, soybeans, pork, beef, fruits, vegetables, and dairy, with duties ranging from 10% to 15%.

In addition, China has expanded its trade countermeasures beyond tariffs. It has tightened export controls on rare earth materials or critical minerals like rare earths, tungsten, tellurium, bismuth, molybdenum, and indium—resources vital to high-tech industries and U.S. manufacturing.

China also added several U.S. companies to its "Unreliable Entity List," subjecting them to trade sanctions and imposed export controls on dual-use items for 16 American firms, including drone manufacturers. Furthermore, China has filed a formal complaint with the World Trade Organization (WTO) against the U.S. tariff measures, signaling a multi-pronged strategy.

Additional Measures: China also added 11 American firms to its "unreliable entity list," restricting their ability to operate in China. Export controls were imposed on 16 U.S. companies to limit the shipment of dual-use items, including drone manufacturers. Furthermore, China initiated anti-dumping investigations into medical CT X-ray tubes imported from the U.S. and India.

Scope of Chinese retaliatory Tariffs: Unlike previous retaliatory measures that targeted specific sectors such as agriculture and fuel, these tariffs will apply to all U.S.-made products. This broader scope is expected to significantly impact various American industries, including pharmaceuticals, crude oil, and agricultural goods.

China’s commerce ministry described the U.S. tariffs as “unilateral bullying” and a violation of international trade rules, arguing that they endanger global economic stability and harm both U.S. interests and international supply chains.

But Chinese officials have urged the U.S. to reverse the tariffs and resolve disputes through dialogue while vowing to "fight till the end" if the trade war persists. Analysts suggest that China’s response, while forceful, appears measured, potentially leaving room for negotiation. This escalation follows earlier U.S. tariff actions in 2025, including a 10% levy on all Chinese goods in February and a subsequent increase to 20% in March, to which China had responded with more restrained tariffs on U.S. agricultural and energy products.

The tit-for-tat measures have heightened global market unease, with Wall Street futures plunged, reflecting fears of a broader trade war and its economic fallout. For the U.S., these tariffs could raise consumer prices and disrupt supply chains, while China aims to mitigate the impact through increased domestic stimulus and diversification of export markets. The escalation in trade tensions between the U.S. and China has raised concerns about a prolonged economic conflict, potentially impacting global trade stability and economic growth. The situation remains fluid, with potential talks between Trump and Chinese President Xi Jinping reportedly in the works, though no firm date has been confirmed as of early Friday.

Meanwhile Trump tweeted/truthed early Friday, April 4, 2025:

·       “CHINA PLAYED IT WRONG, THEY PANICKED - THE ONE THING THEY CANNOT AFFORD TO DO!”

·       “I think it’s going very well—The MARKETS are going to BOOM—“

·       “GREAT JOB NUMBERS, FAR BETTER THAN EXPECTED. IT’S ALREADY WORKING. HANG TOUGH, WE CAN’T LOSE!!!”

·       “Just had a very productive call with To Lam, General Secretary of the Communist Party of Vietnam, who told me that Vietnam wants to cut their Tariffs down to ZERO if they can agree with the U.S. I thanked him on behalf of our Country, and said I look forward to a meeting shortly.”

·       “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always “late,” but he could now change his image, and quickly. Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months - A BIG WIN for America. CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”

Trump was trying to pressure Fed Chair Powell to cut rates sooner rather than later just before his scheduled speech and Q&A session at a conference At the Society for Advancing Business Editing and Writing Annual Conference, Arlington, Virginia.

Relevant Text of Fed Chair Powell’s speech on April 4, 2025:

“At the Fed, we are squarely focused on achieving the dual-mandate goals Congress has given us of maximum employment and stable prices. While uncertainty is high and downside risks have risen, the economy is still in a good place. The incoming data show solid growth, a labor market in balance, and inflation running much closer to, but still above, our 2 percent objective.

Recent Economic Data

After a couple of years of solid growth, many forecasters have anticipated somewhat slower growth this year. The initial reading for first-quarter GDP will be released later this month. The limited hard data are consistent with a slower but still solid growth outlook. At the same time, surveys of households and businesses report dimming expectations and higher uncertainty about the outlook. Survey respondents point to the effects of new federal policies, especially related to trade. We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and monetary policy.

Looking across many indicators, the labor market appears to be broadly in balance and is not a significant source of inflationary pressure. This morning's jobs report shows the unemployment rate at 4.2 percent in March, still in the low range where it has held since early last year. Over the first quarter, payrolls grew by an average of 150,000 jobs a month. The combination of low layoffs, moderating job growth, and slowing labor force growth has kept the unemployment rate broadly stable.

Turning to the other leg of our dual mandate, inflation has declined sharply from its pandemic highs of mid-2022. It has done so without the kind of painful rise in unemployment that has often accompanied periods of tight monetary policy that are needed to reduce inflation.

More recently, progress toward our 2 percent inflation objective has slowed. Total PCE prices rose 2.5 percent over the 12 months ending in February. Core PCE prices, which exclude the volatile food and energy categories, rose 2.8 percent.

Looking ahead, higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters. Reflecting this, both survey- and market-based measures of near-term inflation expectations have moved up. By most measures, longer-term inflation expectations—those beyond the next few years—remain well anchored and consistent with our 2 percent inflation goal. We remain committed to returning inflation sustainably to our 2 percent objective.

Monetary Policy

Turning to monetary policy, we face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation. The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Our monetary policy stance is well-positioned to deal with the risks and uncertainties we face as we gain a better understanding of the policy changes and their likely effects on the economy. It is not our role to comment on those policies. Rather, we make an assessment of their likely effects, observe the behavior of the economy, and set monetary policy in a way that best achieves our dual-mandate goals.

We have stressed that it will be very difficult to assess the likely economic effects of higher tariffs until there is greater certainty about the details, such as what will be tariffed, at what level and for what duration, and the extent of retaliation from our trading partners. While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.

The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. We must keep longer-term inflation expectations well anchored and make certain that a one-time increase in the price level does not become an ongoing inflation problem.

We will continue to carefully monitor the incoming data, the evolving outlook, and the balance of risks. We are well-positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.

Conclusion

We understand the benefits of a solid economy where workers can find jobs and inflation is low and predictable. We also understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. That is why we at the Fed will continue to do everything we can to achieve our maximum employment and price stability goals.”

Highlights of Powell’s statements and Q&A comments on April 4, 2025:

·       Data shows solid growth, labor market in balance, and inflation much closer to, but still above the 2% goal

·       Outlook is highly uncertain, with elevated risks of higher unemployment and higher inflation

·       Most measures of long-term inflation remain well-anchored (as of now)

·       The Fed must make certain that one-time increases in price levels don't become an ongoing inflation problem

·       Tariffs are likely to raise inflation in coming quarters; More persistent effects are possible

·       It's becoming clear that tariff increases will be significantly larger than expected. The same is true of economic effects.

·       It's too soon to say what will be the appropriate path for monetary policy

·       The Fed is well-positioned to wait for greater clarity before considering policy adjustments

·       Progress toward the 2% inflation goal has slowed

·       Surveys show dimming expectations, and higher uncertainty due to new federal policies, especially trade.

·       The Fed is closely watching the tension between hard and soft data

·       Uncertainty is high and downside risks have risen, but the economy is still in a good place

·       Inflation has come down quite a bit, and unemployment is near maximum employment

·       Unhappiness with the economy seems rooted in earlier inflation and still elevated cost of living

·       Inflation has come down quite a bit, and unemployment is near maximum employment

·       Tariffs are higher than almost all forecasters expected, but we still don't know where it will come to rest

·       A year from now, the uncertainty should be much lower as the impact of Trump's policies becomes clearer

·       Policy stance is a good stance to wait. The policy is modestly restrictive

·       It's a good time to take a step back and let things clarify. It's too soon to say what monetary policy response should be

·       If the Fed finds tension between its goals, we will weigh how long it will take to get back to each, which is a difficult decision

·       We face risks of higher unemployment and higher inflation, which is difficult for a central bank

·       On Fed independence: We want to stick to our knitting

·       It's the Fed's job is to bring the economy back to stability regardless of what happens

·       Typically, if one goal is further away, we focus on that

·       Inflation is going to be moving up and growth slowing, but it's not clear what the path of monetary policy should be

·       It feels like the Fed does not need to be in a hurry. We have time

·       For a long time, we will see upward pressure on housing given the lack of supply

·       We're hearing a lot from businesses that they are waiting for clarity to make decisions

·       We will start seeing the impact of policies as the year progresses

·       Beige book is critical for understanding the US economy

·       Sometimes surveys are negative, and people keep spending

·       Business investment is also susceptible to sentiment

Conclusions:

On Friday, April 04, Fed Chair Powell sounded more hawkish than his March 19 Fed presser talks. Powell is now warning about potential stagflation in the US, more persistent inflation, and significantly higher cost of living after seeing Trump’s Liberation Day Reciprocal tariffs. On March 19, 2025, Fed presser, Chair Powell sounded less hawkish on Trump tariffs and the Trumpflation narrative. Powell was cautious in his assessment of how President Trump's trade war might shape the economy, citing the possibility that tariffs' impact on consumer prices would be ‘transitory’. Overall, Powell played safe and avoided a direct head-on collision with Trump on fiscal policy issues on the March 19 Fed presser.

On April 04, Powell sounded less dovish on Trump's trade war policies, but rather than directly criticizing, he pointed out that as a Central Bank, the Fed is committed to restoring 2% inflation (price stability), ensuring maximum employment around 4%. Powell also said as the inflation target is still far away from the employment target, the Fed will be in no hurry to cut rates.

Fed sees stagflation as it projects lower economic (GDP) growth, higher inflation, and a higher unemployment rate for 2025. Fed Holds Rates as unanimously expected; signalled further tapering of QT and virtually blamed Trump policy uncertainty for the stagflationary US economic outlook.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, US Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed needs to bring down average core inflation by around 100 bps to reach the target along with the unemployment rate by around 0.5% by mid-2027 to declare victory.

Fed already cut 100 bps in late 2024 (September-December), anticipating Trump 2.0 and policy uncertainty. Fed may have cut 50 bps in September 2024 in an unusual panic mode after Trump’s election-winning probability started beginning to surge and beat Harris by July amid two consecutive ‘assassination attempts’ on his life. Thus Fed now has the policy space and time to wait & watch till at least H1CY25.

Bottom line

Fed may cut in June and December’25 @25 bps each to be ahead of any potential Trumpcession curve. But if the Fed sees a higher probability of an all-out recession, it may also cut in September to stay ahead of the curve. Fed may also close the QT by December 2025.

Market Wrap:

On Friday, Wall Street Futures plunged on escalating trade war tensions after China imposed retaliatory reciprocal tariffs of 34% on all US imported goods. Also, hotter than expected US NFP/BLS job report and hawkish comments by Fed Chair Powell dampened the risk trade mood. Gold stumbled from China's retaliatory tariffs high on fading hopes of two rate cuts in 2025 (after Powell's comments). There was also some rumor that Trump may sell a part of the US Gold Reserve to pay US debts and Make America Great Again in the Golden Age.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42300) now has to sustain over 42500 for a further rally towards 42700/42900-43200/43500 and 43700/44050 and 44250/44400-44500/44800 and 45000/45200-45300/45500 and even 45700/45800-45900/46000 in the coming days; otherwise sustaining below 42400, DJ-30 may again fall to 42000/41500-40900/39500 and 38700-36100 in the coming days.

Similarly, NQ-100 Future (19900) has to sustain over 20200-21050 for a further rally to 21300/21500-21700/21850 and 22050/22200-22350/22500 and 22700/23000-23300/23500 in the coming days; otherwise, sustaining below 21000, NQ-100 may again fall to 20900/20600-20400/20150 in the coming days.

Also, technically Gold (CMP: 3060) has to sustain over 3035/3065 and 3075-3100 for a further rally to 3125/3150-3200/3225; otherwise sustaining below 3065-3065-3045, Gold may again fall to 2990 and 2965/2925-2900/2880 and 2850/2835-2810/2780-2780 and 2745/2725-2695/2665 and further 2635/2600-2585/2560 in the coming days.