In a surprise declaration today, former President Donald Trump announced that a new trade agreement with China is “done,” signaling a pivotal shift in U.S.–China economic relations. This development comes alongside fresh inflation data showing cooling price pressures, potentially strengthening the case for the Federal Reserve to cut interest rates.
Let’s break down what happened and what it means for markets, policymakers, and global trade.
1. Trump Declares U.S.–China Trade Deal “Done”
Former President Trump, known for his hardline stance on China during his time in office, announced a finalized agreement with Beijing. Key highlights from his statement include:
- Tariffs Breakdown:
- The U.S. will impose a total effective tariff rate of 55% on Chinese goods.
- Trump indicated a new set of China tariffs will be held at 30%, suggesting a layered or tiered approach depending on product categories.
- Reciprocal Arrangements:
- China has agreed to supply “full magnets and any necessary rare earths” up front—critical materials for high-tech industries and defense.
- In return, the U.S. will provide China with unspecified goods or services “as agreed,” hinting at a quid-pro-quo that remains under wraps pending final approval from both Trump and President Xi Jinping.
This deal could reshape global supply chains, particularly in industries heavily reliant on rare earth elements, such as electric vehicles, semiconductors, and renewable energy.
2. Inflation Cools in May: CPI Below Expectations
On the economic front, fresh U.S. inflation data provided a welcome surprise:
| Indicator | May Reading | Estimate | Previous |
|---|---|---|---|
| Headline CPI (MoM) | 0.1% | 0.2% | 0.2% |
| Core CPI (MoM) | 0.1% | 0.3% | 0.2% |
| Headline CPI (YoY) | 2.4% | 2.4% | 2.3% |
| Core CPI (YoY) | 2.8% | 2.9% | 2.8% |
| Supercore CPI (MoM) | 0.06% | — | 0.21% |
| Supercore CPI (YoY) | 2.86% | — | 2.74% |
Notably, the month-over-month core CPI—which strips out volatile food and energy prices—rose only 0.1%, well below the expected 0.3%. Similarly, “supercore” CPI, which focuses on services excluding housing and energy, came in at just 0.06%, the lowest monthly pace in over a year.
Real wages, however, showed some softening:
- Real average hourly earnings (YoY) declined slightly to 1.4%, from 1.5%.
- Real average weekly earnings (YoY) fell to 1.5%, down from 1.8%.
These wage dynamics indicate that while inflation is cooling, income growth may be losing steam, a potential concern for household spending.
3. Traders React: Fed Rate Cut Bets Intensify
With inflation lower than expected and real wage growth decelerating, markets swiftly recalibrated their expectations for the Federal Reserve. Traders are now nearly pricing in two rate cuts by the end of 2025, a stark shift from earlier projections of a single cut—or none at all.
This dovish tilt in market sentiment follows months of “higher for longer” messaging from Fed officials. But with supercore inflation softening and CPI prints cooling, the argument for cutting rates is gaining credibility.
4. Canada: A Warning Signal from the North?
Meanwhile, Canada’s April building permits fell by -6.6%, sharply missing expectations of a 2% increase and extending March’s decline of -4.1%. This could signal broader weakness in the North American real estate sector, or at least a hesitation among developers amid global uncertainty and tight monetary conditions.
A Tipping Point in U.S. Economic Strategy?
The twin developments of Trump’s aggressive tariff deal and softening inflation data point to a potentially transformative moment for U.S. economic policy:
- The trade agreement, if ratified, marks a re-escalation of protectionist measures not seen since the height of the U.S.–China trade war.
- Simultaneously, slowing price pressures open the door for Fed easing, which could mitigate the economic fallout of higher tariffs.
How these forces balance—tightened trade vs. looser monetary policy—will be the story to watch through the second half of 2025.
IBAFIN 
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