President Donald Trump's comments on Tuesday that he won't fire Federal Reserve Chairman Jerome Powell and that he intends to significantly lower 145% tariffs on Chinese imports sent a message that he's done shooting himself — and U.S. financial assets — in the foot. That good news has the S&P 500 surging early Wednesday, building on yesterday's bounce that got an assist from Treasury Secretary Scott Bessent talking up prospects of a China trade deal.
Yet while this is fuel for an S&P 500 rebound attempt, it's hardly a green light for investors. Not firing the Fed chair and thereby risking financial market turmoil is the lowest of the low-hanging fruit Trump can deliver to investors. Trump tariffs are so ridiculously high on imports from China that they could come down to 54% — where they stood on April 2 before the back-and-forth escalation got out of hand — and still act as a huge impediment to two-way trade. Trump did hold out hope for even further reductions, saying only that tariffs on China "won't be zero."
Trump Tariffs: Change In Tactics, Not Strategy
Yet what's completely missing from Trump and Bessent's retreat in the face of unruly financial markets is any signal that their overall strategy and determination to reorder global trade has changed. There's no indication that Trump is backing away from his plan to raise trillions in tariff revenue to help cover the cost of tax cuts and stabilize federal debt levels, and it's not clear that the math works even with all the tariff revenue.
Further, any progress in lowering tariff levels vs. China may be accompanied by higher tariffs on semiconductors and other electronics, as well as pharmaceuticals.
Trump Retreats On Reciprocal, China Tariffs
Wednesday's climbdown by Trump was his third such move in the past two weeks. First, after the S&P 500 fell into bear market territory, Trump announced a 90-day pause on reciprocal tariffs above 10%, except in the case of China. Then he exempted Apple iPhones and other electronics shipped from China from all but a 20% tariff. Yet those two concessions failed to stem a broad-based sell-off of U.S. financial assets, with the dollar falling and 10-year Treasury yield rising even as the S&P 500 skidded lower. Trump's comments on Monday calling Fed Chair Powell a "major loser" added fuel to the fire.
Bessent jumped into action to contain the flames with his Monday evening appearance at a JPMorgan Chase investor forum, calling the status quo vs. China "unsustainable" and predicting a de-escalation in the "very near future." As those remarks came to light in news reports around noon on Tuesday, the S&P 500 shot higher.
China May Drive Hard Bargain
Trump did his part after Tuesday's close, taking any implicit threat to fire Powell off the table and talking up prospects of a deal with China. Yet there are a few reasons not to get excited about the possibility of a breakthrough with Beijing. First, Bessent said that negotiations with China, which don't seem to have started, are likely to be "a slog." Second, Trump didn't give Beijing a particularly gracious invitation to come to the table.
"Ultimately, they have to make a deal because otherwise they're not going to be able to deal in the United States," Trump said. "If they don't make a deal, we'll set the deal."
His implication is that the onus is on Beijing to back down if it wants relief from Trump tariffs, which is essentially the same position that has fed the current standoff. Yet the Trump administration's efforts to relieve financial market stress suggest the U.S. has a more urgent need than China to de-escalate the trade war. Trump's maximalist negotiating stance appears to have backfired by upsetting financial markets, and the subsequent efforts to climb down have weakened his leverage because global trading partners know that the U.S. is in a bind.
All that suggests that China is likely to drive a hard bargain and may think that time is on its side. If Trump is going to get what he wants from China — tariff revenue and a TikTok deal — Beijing may demand an easing of export restrictions on China's access to advanced semiconductors imposed by President Joe Biden.
S&P 500 Rises
The S&P 500 jumped 3% in early Wednesday stock market action, adding to Tuesday's 2.5% gain that marked a follow-through day to confirm the new market rally.
After Tuesday's bounce, the S&P 500 stood 13.9% below its Feb. 19 record closing high, but 6.1% above its 52-week closing low on April 8.
Notably, the S&P 500 and Nasdaq composite on Wednesday gapped above their 21-day moving averages, which has served as resistance in the past two months. Both are still well below their 50-day and 200-day lines.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
