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Last week, the Trump administration announced a 90-day suspension of the reciprocal tariff policy, implementing only an increase in tariffs on Chinese imports to 125%. In response, China raised tariffs on U.S. imports to the same 125% rate and stated that it would ignore any further U.S. tariff hikes. As market fears eased, previously heavily sold stocks rebounded, lifting the S&P 500 by 5.70% to 5,363.36.
In the bond market, a sharp deterioration in U.S. credit outlook, coupled with forced unwinding of basis trades and deleveraging by hedge funds, pushed the U.S. 10-year Treasury yield up nearly 50 bps to around 4.5%. Meanwhile, the U.S. dollar index fell below the 100 mark, closing at 99.783, driven by the appreciation of safe-haven currencies such as the Japanese yen.
Key Economic Data Last Week
US CPI: The CPI rose 2.4% YoY (prior: 3.0%) and declined 0.1% MoM (prior: +0.2%) in March. Core CPI rose 2.8% YoY (prior: 3.1%) and 0.1% MoM (prior: +0.2%), both below expectations and marking the first time since Spring 2021 that core inflation fell below 3%. The decline in energy, recreation, airfares, and auto insurance prices contributed significantly to the cooling inflation. Additionally, shelter prices—the largest component of core inflation—hit their lowest YoY growth since November 2021, signaling a continued unwinding of inflationary pressure.
Although the 25% tariffs on steel and aluminum and the 20% tariff on Chinese goods were implemented in March, the weaker-than-expected inflation figures suggest these tariffs have not yet been passed on to consumer prices. This could reflect weakening consumer spending due to deteriorating confidence about the future.
With both China and the U.S. having raised tariffs on each other to as high as 125% and 145% respectively, and the U.S. also applying an additional 10% global tariff, there is a risk that firms may pass rising input costs onto consumers. This would likely reignite core goods inflation and further suppress spending momentum.
China CPI: The CPI decline 0.1% YoY (prior: -0.7%) in march, marking the second straight month of deflation, and decline 0.4% MoM (prior: -0.4%). Core CPI YoY was 0.0% (prior: -0.2%), and MoM increased 0.5% (prior: -0.2%).
Food prices declined -1.4% MoM, accounting for about 60% of the overall monthly drop, reflecting improved supply of fresh produce as weather conditions normalized.
Consumer goods prices rose to -0.4% MoM (prior: -0.9%) due to consumption-stimulus policies such as appliance trade-in programs. However, the underlying trend remained weak. Service prices also showed similar patterns, rising 0.4% MoM (prior: -0.3%), though non-essential service categories like airfares and travel continued to decline, dropping 11.5% and 5.9% respectively.
Overall, the rebound in CPI largely reflects the fading of Lunar New Year calendar effects. Although there are signs of a rebound in core inflation, PPI has now contracted for 30 consecutive months. With persistent property sector weakness and rising trade tensions with the U.S., China is under increasing pressure to further ease policy and provide stimulus.
FOMC Minutes: Fed officials acknowledged that while shelter-related inflation is easing, core goods prices may be heating up again due to tariff expectations, with some suggesting this trend could be persistent. Regional contacts reported rising input costs, with firms preparing to pass these on to consumers.
On the labor market, officials generally viewed conditions as balanced. However, federal spending cuts have begun to impact government contractors, universities, and healthcare providers, with some firms reporting layoffs or hiring freezes. The Fed emphasized that policy uncertainty from tariffs and fiscal changes is heightening downside risks to both employment and economic growth, while inflation risks are also rising.
Key Economic Data This Week
China Q1 GDP: Boosted by front-loaded exports amid intensifying trade tensions and enhanced stimulus (notably, the appliance trade-in program), Q1 GDP is expected to rise 5.2% YoY. However, the sustainability of this momentum remains uncertain.
US March Retail Sales: Despite weakening consumer sentiment due to volatile tariff policies and a sharp equity market correction, robust job gains and pre-tariff durable goods purchases in late March are expected to lift MoM retail sales by 1.4% (prior: +0.2%).
ECB Rate Decision: Despite signaling the end of its rate-cutting cycle in the last meeting, the ECB is still expected to cut the deposit facility rate by 25 bps to 2.25%, given persistent recession risks and continued 25% tariffs on steel, aluminum, and autos—even after the U.S. suspended reciprocal tariffs for 90 days.
