Wentz Weekly: China Trade Truce

Wentz Weekly Insights
Fed Meeting A Non-Event But China Trade Truce Has Stocks Rallying

Stocks were flat to slightly lower last week which follows a strong performance the week prior, with stocks at the same level they were prior to the “Liberation Day” tariff announcement, but still 8% from the all-time highs reached February 19. Breadth was much better this week, with the average stock performing much better as the equally weighted S&P 500 increased 0.40% while the cap weighted S&P 500 fell 0.47%.

While there was a Fed event on Wednesday, it turned out to be more of a non-event. The FOMC agreed to keep interest rates unchanged and kept its balance sheet plans unchanged.

There were small changes to the policy statement – it directly called out how net exports have affected data, referring to the negative print on Q1 GDP due to a surge in imports as businesses attempted to import to get in front of tariffs. It added the word “further” when saying uncertainty on the economic outlook has increased. It also added that risks to both sides of its mandate – higher unemployment and higher inflation – have increased.

Regarding the environment moving forward, Chairman Powell gave no indication or guidance on what the Fed will do at its next several meetings. He repeatedly said tariffs have increased the risks of both higher unemployment and higher inflation, but emphasized policy is in a good place and it is well positioned to respond in a timely manner to economic developments. He repeatedly said the Fed will wait and see how the economy evolves.

Chances of a rate cut at the next meeting in mid-June moved down to about 10% after the Fed meeting with the odds of the first rate cut remaining at the September meeting. By year end, markets are putting only a 4% chance of no rate cuts, 20% chance of one, 36% chance of two and 30% chance we will see three rate cuts over the remaining five meetings of the year.

There has been renewed optimism in the markets over an improved trade picture. Several reports came out last week on trade talks including one where Treasury Secretary Scott Bessent said Administration officials are negotiating with 17 major trading partners and could start announcing trade agreements any moment. He added that trade partners have made very good offers and Trump officials were in the process of re-negotiating now. He said he expects “”that we can see a substantial reduction of the tariffs that we are being charged, as well as non-tariff barriers, currency manipulation and subsidies, both labor and capital investment.”

The only official announcement last week came between the U.S. and the UK. It was a framework agreement where a 10% universal tariff on all imported goods will be in place, but will include lower tariffs for cars made in the UK and beef and aluminum and steel tariffs will be cut close to 0%. Trump also said billions of dollars of increased market access of U.S. exports will be available.

But the biggest news came late in the week when reports said Bessent and U.S. Trade Representative Jamieson Greer would be meeting with China Vice Premier He Lifeng in Switzerland to discuss economic matters. It was reported the meeting was to be more focused on de-escalation rather than an actual trade deal, with Trump saying the 145% tariff rate would be coming down, adding if talks go well he will speak with China’s President Xi.

Reuters reported China was feeling the pressure and driven to the negotiating table over concerns about the economic pain the tariffs would cause and the risks of isolation, particularly as other key trading partners like Vietnam, Japan, and India have quickly come engaged in talks with the U.S.

It was reported later in the day Sunday the U.S. and China reached a framework agreement on trade that would lower tariffs on both sides in a major de-escalation of tensions. The framework agreement gives both sides 90 days to further negotiate while reducing the 145% U.S. tariff on Chinese imports down to 10%, but keeps the 20% tariffs relating to fentanyl in place, brining the total tariff to 30%. China’s 125% tariff on U.S. goods will drop to 10% during this period.

Bessent said both sides agreed they “do not want a generalized decoupling,” adding the U.S. will do a strategic decoupling when it comes to items they discovered were of national security interests. He added its “implausible” the 10% tariffs go lower but the 34% tariff (the initial “reciprocal tariff” announced April 2) will be a ceiling, and some fentanyl tariffs could come off if there is engagement from China on working toward solving the crisis.

This was great news for world trade, but it is important to note there is no actual trade agreement made yet – officials are indicating it is a trade truce to lower the tariff rate for 90 days in a move to de-escalate and give both parties more time to hash out a larger, more in depth trade agreement. As we saw in early April, things could quickly change and we will continue to monitor all details.

Recent Economic Data

• ISM Services Index: The ISM services index was 51.6 for April, slightly more than the 50.4 that was expected and up roughly one point from March, indicating the services sector in the U.S. expanded modestly in April. New orders increased 2 points, suggesting improved demand over March, with 11 of the 18 major industries reporting growth in the month, though a decrease from 14 that reported growth the first two months of the year. The employment index remains in contraction (anything below 50) at 49.0, but improved from 46.2, while the prices paid index jumped to 65.1 for the highest since early 2023.

• Trade Deficit: The trade deficit exploded in February and widened even more in March. The data shows the U.S. carried a $140.5 billion trade deficit in the month, $17.3 billion more than last month and the largest ever. Exports increased $0.5 billion, or 0.2% in the month. Imports surged another $17.8 billion, or 4.4%, driven by higher pharmaceuticals, cellphones, and other household goods. Year-to-date, the trade deficit has grown 92.6% from the same period in 2024. Trade volume, an indication of cross-border economic activity, increased 18.1% from last year. Obviously, trade has been majorly impacted with the recent tariff announcements with businesses trying to get ahead of the tariffs. It is likely we see a downward revision to first quarter GDP after receiving this data.

• Jobless Claims: The number of unemployment claims made the week ended May 3 was 228,000, a decrease of 13k from the prior week, with the four-week average up slightly to 227,000. The number of continuing claims was 1.879 million, down 29k from the prior week and the four-week average up slightly to 1.875 million.

• Productivity & Costs: U.S. worker productivity declined 0.8% in the first quarter, in line with expectations for the first productivity decline since Q2 2022, coming after a 1.7% increase in Q4 2024. Output decreased 0.3% in the quarter while the numbers of hours worked increased 0.5%, leading to the decline in productivity. On the other hand, unit labor costs increased 5.7% in the first quarter, reflecting a 4.8% increase in compensation and the 0.8% decrease in productivity. Recall that productivity increase is the main driver of longer-term economic growth. Despite the first quarter decline, productivity is still up 1.4% from a year ago.

Company News

• Berkshire Hathaway: In the last minutes of its quarterly earnings meeting, Warren Buffet, CEO of the company and one of the most successful investors of all-time, announced he will step down as Chief Executive Officer of the company at the end of this year after holding the position for over six decades. Buffett, age 94, will remain chairman of the company but will hand off CEO title to Greg Abel. Abel is the current Vice Chairman and heads the company’s non-insurance operations since 2018.

• Skechers: The footwear maker Skechers reached an agreement to be acquired by 3G Capital, a global investment firm, for $63/share or a 27.6% premium to where shares traded prior to the announcement. 3G Capital is a large investor in companies such as Anheuser-Busch, Kraft Heinz, and Restaurant Brands International, owner of Burger King, Tim Hortons, Firehouse Subs, and others.

• Walt Disney: Disney announced it reached an agreement with leisure and hospitality company Miral to create a Disney theme part resort in Abu Dhabi located on Yas Island, a worldclass destination for entertainment and leisure which is home to Ferrari World, Sea World, and Warner Bros. World. It will be Disney’s seventh resort theme park and will be fully developed and built by Miral. Disney will not be investing capital in the project but will receive royalties.

• Apple & Google: Apple’s senior vice president of services Eddy Cue said during his testimony in the Justice Department’s lawsuit against Apple that the company is actively looking at revamping its Safari web browser on its devices to focus on AI-powered search engines, dealing a potential major blow to Google. The lawsuit is related to Apple and Google’s estimated $20 billion per year partnership where Google is the default for Apple’s search queries on its browser. Cue added that searches on Safari fell for the first time ever last month, which he contributed to people using AI search providers. Alphabet shares fell 7.3% after the news. Google later responded that it continues to see overall query growth in Search, including on Apple devices

Other News:

• OPEC Production Increases: Oil fell to the lowest level since early 2021 after several of the largest OPEC oil producers agreed to a plan to accelerate production in effort to bring oil supply back to the market after several years of output cuts that were meant to support oil prices. The nations said they will add 411,000 barrels of oil per day to the market starting in June (for reference, global oil supply is around 103 million bbl/day). The group will continue to meet monthly to evaluate the impacts of the increased supply. Reports later said Saudi Arabia was pushing for the move to punish OPEC members that were producing over their quotas.

• X-Date: Treasury Secretary Bessent warned House Speaker Johnson the government’s extraordinary measures could run out (the so called X-date) while Congress is on its summer recess in August if Congress does not raise the debt ceiling by mid-July. It was only a coupled days earlier the Congressional Budget Office released a report projecting the government’s cash to run out by early September.

• Trump Supporting Higher Taxes: Reuters reported people familiar with the matter said President Trump is urging House Speaker Johnson to raise the tax rate on the wealthiest Americans and close the carried interest loophole. Republican leaders have found difficulties on extending the 2017 Tax Cuts under Trump’s first term, while removing tax on tips, overtime pay, and Social Security benefit payments, without adding too much to the debt. Trump was pushing to raise the top tax rate to 39.6% from the current 37% for those making over $2.5 million. Republicans are also looking at reducing spending on Medicaid for lower-income earners and eliminating certain tax credits.

• IRS Employee Cuts: A Bloomberg article noted the IRS has lost about 31% of its auditors from buyouts and layoffs tied to Elon Musks and the Department of Government Efficiency’s efforts. Since the buyout offer was announced, about 3,600 IRS revenue agents have left. In addition, it said 18% of revenue officers, who collect taxes, and 10% of tax examiners, those that review returns, have left. It is to be noted the IRS had a large number of newly hired auditors due to a boost in funding under the Biden Administration.

• Tariffs:

  • President Trump said via his Truth Social account he plans to impose a 100% tariff on “any and all movies coming into our country that are produced on foreign land.” He said other countries are offering incentives to draw filmmakers away from the U.S. There are no tariffs imposed yet and the White House is figuring out how it would be implemented.

  • The U.S. and UK announced both sides have reached a framework agreement on trade. The deal keeps the baseline 10% tariffs on imported goods that was announced in April but includes a lower tariff for cars made in the UK and what Trump said was billions of dollars of increased market access of U.S. exports.

  • After a long meeting in Switzerland between Treasury Secretary Bessnet and China Vice Premier He Lifeng, the U.S. and China agreed to temporarily suspend most tariffs on each other’s goods while it continues to negotiate a larger agreement. Earlier last week, top Administration officials were saying the initial talks were to focus on a de-escalation rather than a sweeping trade deal. The agreement means tariffs will be cut to 10% for 90 days, but the 20% tariff on China relating to fentanyl will remain in place, meaning total tariffs on China now stand at 30%.

  • Bessent said the Trump Administration was negotiating with 17 major trading partners, and 18 after including this weekend’s discussions with China, and could start announcing trade agreements any day after many partners have made very good offers. He added he expects “”that we can see a substantial reduction of the tariffs that we are being charged, as well as non-tariff barriers, currency manipulation and subsidies, both labor and capital investment.”

WFG News

Welcome our Newest Team Member!

Please join us in welcoming Emily Trout to the Wentz Financial Group team. Emily started with WFG at the beginning of March working part time. She is now transitioning to a full-time position after recently graduating from The Kent State University with her bachelor’s degree in the College of the Arts. Emily’s role is a Client Service Administrator at our Hudson office. Her focus is assisting our financial advisors by managing incoming communications, along with scheduling, client onboarding, and daily account activity.

Summer Hours

Please note that beginning Memorial Day (May 26), Wentz Financial Group will be implementing its summer hours. We will be open and available between 8:30am and 4:00pm Monday through Friday from Memorial Day through Labor Day. As always, if you need to speak or meet outside these hours, please contact us and we are happy to set up a time that works.