With no hope of ousting Powell and the trade war facing obstacles, how will the market develop after Trump softens his stance?

Written by: Luke, Mars Finance

On April 23, 2025, the global financial markets are at the center of a storm. President Trump’s recent series of unexpected policy shifts, from his public criticism of Federal Reserve Chairman Powell to the sudden softening of tariffs on China, has triggered intense fluctuations in market sentiment. All of this has not only left Wall Street traders holding their breath but has also prompted global investors to reassess the outlook for the U.S. economy. Will Trump’s "softening" provide a respite for the markets? Or has it merely postponed a larger crisis?

1. Trump's "softening" and the dramatic reversal of market sentiment

Speaking at the White House on April 22, Trump announced that the 145% tariffs on China "will be significantly reduced," although "there will be no zero." This statement was in stark contrast to the previous hawkish trade war posture and instantly ignited optimism in the market. On the day, futures for the three major U.S. stock indexes rose rapidly, with Nasdaq and S&P 500 futures both rising more than 2%, and Dow Jones futures also recording gains of more than 1.5%. Bitcoin topped $93,000, hitting a fresh two-month high, while gold prices retreated below $3,300, indicating that risk aversion has receded.

Trump's "softening" is not an isolated incident. On the same day, U.S. Treasury Secretary Scott Basset released similar signals at a closed-door investor meeting, stating that the high tariffs stalemate between the U.S. and China is "unsustainable" and predicting that tensions will ease in the coming months. Basset's remarks injected confidence into the market, and investors began to bet on a possible breakthrough in U.S.-China trade negotiations. However, Basset also admitted that a comprehensive agreement could take two to three years, which means that the easing in the short term is more of a tactical adjustment rather than a strategic shift.

Trump's shift was not entirely unexpected. The 145% tariffs – including a 20% tariff imposed due to the "fentanyl" issue and a 125% "reciprocal tariff" – have pushed China-U.S. trade to the brink of a standstill. China’s retaliatory measures, especially the 125% tariffs on U.S. agricultural products like soybeans and corn, have severely hit American exporters. U.S. farmers and manufacturers reliant on the Chinese market have suffered heavy losses, and the higher prices of imported goods due to the tariffs have begun to erode American consumers' purchasing power. Faced with domestic economic pressures and strained global supply chains, Trump had to adjust his strategy, attempting to ease the trade war to buy some breathing room for the U.S. economy.

Powell's "position preservation" and the brief victory of Federal Reserve independence

At the same time, Trump's offensive against Fed Chairman Jerome Powell has quietly reined in. Previously, Trump repeatedly publicly criticized Powell, calling him a "major loser" and hinting at the possibility of firing him. The comments sparked concerns about the Fed's independence, leading to a rare "triple kill" for the dollar, Treasuries, and U.S. equities on April 21, with the Dow Jones falling more than 1,300 points at one point, the U.S. dollar falling below 140 against the Japanese yen to a three-year low, and the U.S. 10-year Treasury yield surging on selling pressure.

However, on April 22, Trump suddenly reversed his stance, stating that he had "no intention" of firing Powell. This statement quickly calmed the market's panic, causing the dollar index to rebound to around 99, U.S. Treasury prices to recover, and the stock market to experience a wave of rebound. Analysts pointed out that Trump's concession was not out of respect for the Federal Reserve, but rather due to market pressure. Firing Powell not only carries legal controversy but could also lead to more severe consequences. As Paul Ashworth, chief North American economist at Capital Economics, warned, removing Powell is just the first step in undermining the independence of the Federal Reserve; if Trump further intervenes in monetary policy, it could lead to a sharp decline in the dollar, soaring Treasury yields, and even trigger a chain reaction in global financial markets.

Despite Powell temporarily holding onto his position, the Federal Reserve's situation remains difficult. Trump's strong expectations for interest rate cuts sharply contrast with Powell's insistence on a prudent monetary policy. The market generally expects the Federal Reserve to continue maintaining high interest rates in the first half of 2025 to address persistent inflationary pressures. This suggests that the U.S. economy may face greater downside risks, and whether Trump's policy shift can effectively alleviate this pressure remains uncertain.

The Aftermath of High Tariffs and Concerns for the U.S. Economy

Although Trump's high tariff policy has secured negotiation leverage for the U.S. in the short term, its side effects are becoming apparent. Firstly, high tariffs have directly increased the prices of imported goods, especially everyday items, electronics, and clothing imported from China. These costs are ultimately passed on to consumers, particularly low- and middle-income households, which face greater pressure on their disposable income. Secondly, U.S. companies are highly reliant on Chinese raw materials and components, and high tariffs have led to increased manufacturing costs, while adjusting supply chains is costly and time-consuming. More importantly, China's retaliatory tariffs have severely impacted U.S. exporters, especially agricultural exporters, who have lost access to this key market in China.

Goldman Sachs' latest research further reveals the potential impact of tariffs on the economy. The report points out that the inflationary effects caused by tariffs typically manifest within two to three months after implementation, while consumer spending tends to slow down rapidly following price increases. Core retail sales, as a leading indicator of consumer spending, may issue warning signals in the coming months. Additionally, tightening financial conditions and rising policy uncertainty will weigh on capital expenditures, with a projected decline of 5.5 percentage points in capital expenditure growth in the second half of 2025. These cumulative factors may cause the U.S. economy to show signs of weakness in late summer.

More concerning is that recent business survey data has sounded the alarm. Indicators such as the Philadelphia Fed Manufacturing Index and the ISM Services Index have significantly declined, with some metrics even dropping to their lowest levels during non-recessionary periods. Although soft data in recent years has been overly pessimistic due to factors like the pandemic, Goldman Sachs believes that the current deterioration signals may be more reliable, as they are primarily driven by expected declines in activity rather than temporary biases related to the pandemic. This suggests that the U.S. economy may be sliding towards the brink of recession, and whether Trump's "self-correction" can reverse this trend still requires more verification from economic data.

Market Outlook: Short-term Rebound and Long-term Uncertainty

Trump's policy shift has brought a short-term breather to the market. The rebound of the US stock market on April 22 shows that investors are confident in the easing of tariffs and the restoration of the Federal Reserve's independence. Bitcoin has surpassed $93,000, reflecting the renewed appeal of risk assets. However, the sustainability of this rebound is questionable. The following key factors will determine the future direction of the market:

Validation of economic data: Upcoming initial jobless claims, unemployment rate, and Q1 GDP revisions will be the focus of the market. If Michigan inflation expectations continue to be "stubborn" or GDP data is revised sharply, the market may return to the theme of "inflation and economic damage", and the rally momentum in US stocks will quickly fade.

Federal Reserve's policy stance: Despite Powell temporarily retaining his position, the Federal Reserve's tough attitude under high inflation pressure may exacerbate the risks of economic downturn. If the Federal Reserve continues to refuse to cut interest rates, the resilience of the U.S. economy may collapse first, and Trump's intervention pressure may resurface.

The independence of Bitcoin: Bitcoin recently surpassed $93,000, partly due to improved market sentiment. However, as safe-haven demand weakens, it remains to be seen whether Bitcoin can maintain its unique narrative as an "economic safe haven." If subsequent economic data triggers a decline in U.S. stocks, Bitcoin's independence will be put to the test.

Impact on the Global Economy: The International Monetary Fund (IMF) latest "World Economic Outlook" warns that the global economy remains themed around "recession." Trump's tariff relief may provide some breathing room for global supply chains, but if the U.S. economy falls into recession, the global economy may be dragged into a deeper quagmire.

How far can Trump's "softening" go?

Trump's policy pivot has undoubtedly injected short-lived optimism into markets, but there is a deeper uncertainty behind it. The aftermath of high tariffs, worries about the U.S. economy, and the Fed's policy woes could reignite market volatility in the coming months. In the short term, U.S. equities and risk assets are likely to extend their rally, but investors need to keep a close eye on economic data and the Fed. Once the recession signal becomes more apparent, the market may face an even greater test.

For Trump, "softening" may be a stopgap measure, but to truly stabilize market confidence, more substantial policy adjustments are needed. In the current tumultuous global economy, whether the United States can avoid recession and whether the global economy can escape the fate of being a "casualty" depends on the next moves of the Trump administration. For investors, staying vigilant and cautiously positioning themselves is the best strategy to cope with this storm.