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Today is certainly a “rip up the script” sort of day. Obviously, the market enjoys the tariff relief – a 30% levy on Chinese goods is certainly better than 145% — and we’re seeing a powerful, broad-based rally as a result. That said, there’s been a lack of follow through after the huge pre-opening move. I’m curious to see whether this morning’s minor pullback from the pre-market highs is simply a pause or the start of a “sell the news” moment. 

To be sure, 30% is a huge improvement over where we stood last week. Remember, the market seemed ok with the 80% number that was floated on Friday ahead of the talks. That said, even “just” 30% still quite a big bump from the tariff levels that prevailed before “Liberation Day”. Also, the current arrangement brings its own bout of 90-day anxiety.Just like the broad array of tariffs that have a 90-day pause until early July, this deal has its own August expiration date.Given the recent patterns, though, it is hard to expect that the moratoria won’t be extended unless there is a major implosion in the ongoing negotiations.

Taking the worst case off the table has caused rate cut expectations to fall further.The diminishing rate cut expectations are a “tell” that investors believe that the Federal Reserve is, or will be, more concerned about a weaker economy than price pressures.If price pressures were the concern, then we would expect to see rates fall because the Fed would have more room to cut without tariffs stoking as much inflation.Instead, with price pressures diminishing today, we see rate cut expectations diminishing.The only explanation is that the economy won’t be as adversely affected by tariffs, thus we have less need for Fed action. 

At the start of this month, Fed Funds futures were implying a 62% chance for a rate cut at the next FOMC meeting on June 18^th.  That is currently down to 8%.Quite frankly, I never understood why the market might expect rate cuts before the 90-day moratorium expired, but it is hardly unprecedented to see over-enthusiastic rate cut expectations in the market.Moving forward, we now see futures pricing in a 45% chance for a cut in July, which is down from a 45% chance of a second cut by July; just over two cuts are now priced in for December where nearly four were priced in for that date at the start of the month.Participants on IBKR’s ForecastTrader broadly agree, though the 43% probability of a rate above 3.625% in December is a bit more aggressive than the futures market.

The risk-on tone encompasses most of the market sectors, with only two reasonable exceptions. At midday we see Consumer Staples and Utilities as the two sectors that are failing to participate in the rally.The former is slightly lower as investors move from defensive stocks to more aggressive ones, while the latter is also affected by higher interest rates. Gold is lower, both on the shrinking trade tensions as well as the stronger US dollar (up about 1.5 Euro cents and nearly 3 full Yen). Bitcoin, however, is lower.That is typically a risk metric of its own, rather than an “anti-dollar”, so it is interesting to see it pull back as money flows heavily into equities.Perhaps it means that money is flowing out of crypto and into equities.

Looking ahead, it is quite clear that investors have been lapping up positive tariff news.But with the biggest, baddest tariff seeing a huge improvement, will other positive developments move the needle quite so much?Much depends upon how we finish today.If we hold the current levels or improve upon them, then the trend will continue.If instead we see some profit taking creep in before the close, that could indicate that we’ve reached a short-term sentiment peak.

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