Dow Jones Industrial Average surges higher on US-China tariff walkback

• The Dow Jones soared over a thousand points from last week's closing prices following opening US-China trade talks over the weekend.
• US tariffs on Chinese goods are being lowered to 30%, while Chinese tariffs on US imports are being cut to 10%.
• The temporary tariff cuts are set to come into effect from Tuesday and last 90 days.

The Dow Jones Industrial Average (DJIA) soared on Monday, rising over a thousand points and climbing back above the 42,000 handle for the first time since early April. Steep (albeit temporary) cuts to triple-digit tariffs going in both directions between the United States (US) and China have bolstered investor confidence that the Trump administration will continue to grind away at its own trade policy stance.

Markets get a tariff reprieve...for now

The US and China both agreed to trim their tit-for-tat tariffs on all imports going in both directions for the next 90 days. The US will continue to charge a flat 10% "universal" tariff, as well as an additional 20% tacked on due to the fentanyl epidemic. Despite the amount of US spending on policing and border control, the Trump administration continues to lay responsibility for the drug crisis at the feet of foreign governments. China has agreed to trim its tariffs on US goods to 10% for the 90-day period.

Tariff cuts come at a crucial time: the first batch of US inflation data that includes the start of the Trump administration's sweeping 'reciprocal' tariffs is set to be released this week. US Consumer Price Index (CPI) inflation for the month of April will be released on Tuesday, with median market forecasts expecting an uptick in both headline and core CPI inflation measures for the month. YoY CPI is still expected to hold steady over the previous annualized period, with core CPI forecast to hold flat at 2.8% YoY.

Core CPI inflation has remained stuck above the Federal Reserve's (Fed) target inflation rate of 2% for four straight years. Despite coming down significantly from a decades-long peak of 6.6% in 2022, the Fed has struggled to deliver interest rate cuts as quickly as markets would like them. Progress on getting inflation down to target has largely stalled out, according to policymakers at the Fed, and market expectations of a rate cut as early as July have tumbled.

Rate cut hopes get pushed back another month

The majority of rate traders now expect the Fed to continue holding policy rates flat until at least September. According to the CME's FedWatch Tool, rate markets are pricing in nearly 60% odds that the Fed will stay the course in July, a sharp reversal from better-than-even of a quarter-point rate cut on July 30 that persisted until as recently as last week.

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Dow Jones price forecast

Monday's tariff-off rally has bolstered the Dow Jones back above the 200-day Exponential Moving Average (EMA) near 41,500 for the first time since early April and pushed the DJIA north of the 42,000 major price handle in the process. The Dow has recovered nearly 16% after bottoming out near 36,600 following the post-tariff announcement plunge on April 2. However, the major equity index is still 6% away from reclaiming all-time highs north of the 45,000 level.

Dow Jones daily chart