Stocks climb as US President Donald Trump flags major trade deal amid stagflation risk

Just what is actually announced in the coming months will matter a great deal to markets and the Federal Reserve, which dialled up its warning on the stagflation risk of tariffs.

US officials continue to talk up the prospect of trade deals for all they’re worth.

But just what is actually announced in the coming months will matter a great deal to markets and the Federal Open Market Committee, which dialled up its warning on the stagflation risk of tariffs.

The latest news was US President Donald Trump’s promise on Truth Social of a “major trade deal with representatives of a big, and highly respected, country.”

President Trump called a press conference for 10am EDT (12am AEST) adding that this trade deal will be “the first of many!” His top trade adviser, Peter Navarro, told CNN earlier this week that he suspected the UK may be the first country to sign a deal.

That would be no big surprise, given that the UK is one of the closest US allies.

US President Donald Trump speaks during a swearing in ceremony for the Ambassador to China, former Republican Senator of Georgia, David Perdue at the White House. Picture: Jim Watson/AFP

But while Treasury Scott Bessent and Trade Representative Jamison Greer are due to meet China’s Vice Premier He Lifeng in Switzerland this weekend to “de-escalate”, as Bessent put it, less-US friendly countries like China and the European Union may be somewhat harder to deal with. A first trade deal would be symbolically important and help bring other countries to the table. But with stocks having recovered strongly toward record highs in recent weeks, a rollback of China tariffs to 50-60 per cent from about 145 per cent now and a significant lowering of reciprocal tariffs for other countries has arguably been priced in.

At the same time, markets haven’t priced in much weak of weaker economic growth.

President Trump has said in recent days that he’s willing to lower tariffs on China at some point, but has also downplayed tariff talks, saying “we don’t have to sign deals.”

On Wednesday, he indicated that he won’t lower tariffs to kickstart trade talk with China.

On a worrying note, Bloomberg reported that the EU will propose tariffs on Boeing aircraft and US-made cars if talks with Trump’s administration fail to de-escalate the trade conflict.

US industrial goods face the biggest reprisals, while food and agriculture products also will be among the top categories in a new list of duties that the commission will make public on Thursday.

About €100bn ($156bn) in American exports would be hit with additional tariffs, Bloomberg said.

S&P 500 futures rose 0.8 per cent in Asia-Pacific trade, lifting Australia’s S&P/ASX 200 into the black despite falls in banks as ANZ results didn’t impress and Westpac traded ex-dividend.

But investors may have been hedging their bullish bets on stocks again.

Spot gold rose as much as 1.5 per cent to $US3,417.78 per ounce on Thursday after dropping 2 per cent on Thursday amid gains in US stocks after news of the weekend talks with China.

Gold later turned down 0.7 per cent to $US3,335.56 in volatile trading.

The US administration recently cited “significant progress” toward a bilateral trade deal after talks between Vice President JD Vance and Indian Prime Minister Narendra Modi.

President Trump has also said there was “big progress” in talks to strike a deal for Japan.

But while Federal Reserve chair Jerome Powell highlighted the recent strength of the US economy as a reason why the Fed can afford to sit on its hands – noting that “the costs of waiting are fairly low” – the FOMC said: “uncertainty about the economic outlook has increased further.”

In a nod to the risk that tariffs increase the risk of stagflation in the US economy, the FOMC said it’s “attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

US Federal Reserve chair Jerome Powell speaks during a news conference following a FOMC meeting. Picture: Brendan Smialowski/ AFP

Capital Economics said the Fed’s caution is understandable given the uncertainty around how the US economy will weather the tariffs and what tariffs will actually be implemented in the medium term.

But it questioned the extent of market pricing of rate cuts – about 75 basis points this year.

“One way of interpreting this path is that investors see a significant tail risk of a recession in which the Fed would have to cut very rapidly, against a central scenario in which they don’t,” said Capital Economics head of markets, Thomas Mathews.

“If so, the news on the economy probably wouldn’t need to be strong to shift pricing quite a bit, it would just need not to show a significant deterioration. But the other question then is what the Fed does in the non-recessionary – but probably stagflationary – scenario.

“We suspect that if investors are still hoping for a cut or two this year in that situation, in which tariffs will have pushed core CPI inflation back up towards 4 per cent, they will be disappointed.”

While there’s currently little concern about “second-round” inflation effects that would worry the Fed enough to delay easing, he thinks the Fed’s caution on inflation will keep it on hold for the rest of the year unless the labour market cracks. Even then, it’s a question of degree.

“In the past, quiescent inflation has allowed the Fed to respond swiftly to down drafts in growth,” said GSFM investment specialist and former BlackRock head of fixed income, Stephen Miller.

“In the current environment, however, ‘sticky’ inflation has robbed the Fed of the flexibility to quickly cut rates, a flexibility that it enjoyed in the two decades or more leading up to the pandemic.”

And with a budget deficit approaching 7 per cent of GDP, fiscal policy is already close to maxed out.

“Financial markets appeared to be buoyed by Powell’s assertion that the economy is currently holding up relatively well despite uncertainty and the challenges ahead,” Mr Miller said.

“I fear that markets are overly complacent.”

Originally published as Stocks climb as US President Donald Trump flags major trade deal amid stagflation risk