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US-China Truce 'Dramatically' Reduces Recession Odds: Lazar
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May 12, 2025
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9:48Now PlayingNancy Lazar, chief global economist at Piper Sandler, talks the economic impact of the temporary trade truce between the US and China and why she's taking an optimistic outlook on tariff negotiations.
With Wall Street kicking off another rally, American stocks are now trading like Donald Trump’s “Liberation Day” shock never happened.
The S&P 500 jumped 2.6%, and the Nasdaq 100 Index was on the cusp of a bull market, powered by a resurgence in megacap tech shares. The dollar rose and Treasuries fell, while traders pared back their expectations for US interest-rate cuts this year.
The easing of trade tensions between the US and China gives investors their clearest indication yet that the Trump administration is taking a softer approach to the clashes that upended global markets just a few weeks ago. With hopes riding high that the US economy can avoid a recession, traders now expect the Federal Reserve to lower rates just twice in 2025.
“People are taking off some of the recession trades they had,” said Mark Dowding, chief investment officer of BlueBay Fixed Income. “This all makes sense as there had been this legitimate fear that we could end up with some sort of cliff-edge event, where the US economy really hit the buffers hard with trade coming to a bit of a sudden halt. And that has now been pushed back.”
Big tech stocks, which had been hammered in the selloff, led the advance. Meanwhile, safe haven assets dropped, with gold, the Japanese yen and the Swiss franc sinking in unison. The euro fell as much as 1.6% to $1.1072, putting it on track for its worst day this year.
Swaps tied to Fed meetings now favor a quarter-point reduction in September. Last week, they indicated three cuts this year, with a change likely as soon as July.
Some investors were wary about the lack of detail in Monday’s announcement and the risk of another flare-up between Beijing and Washington. US President Donald Trump said he would likely speak to Chinese leader Xi Jinping later this week.
While the two countries have three months to work through their differences, that’s not a lot of time to negotiate a complex trade dispute. It’s also unclear what the goal is at the end of the cooling-off period. Asked what would happen at the end of 90 days to avoid tariffs ratcheting back up, Treasury Secretary Scott Bessent indicated there’s a chance to extend the truce further.
In the meantime, Chinese exporters will likely use the time to ship even more products to the US or through other countries, exacerbating imbalances.
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