By Morgan Stanley's Vishwanath Tirupattur, global head of Quantitative Research, and Michael Gapen, chief US economist
Following Monday’s announcement of a 90-day pause on reciprocal tariffs between the US and China, the response in risk markets has been resoundingly positive through the first four trading days. The S&P 500 is up 4.5% from last Friday’s close, and year-to-date returns are back in the black after Liberation Day drove steep declines in April. Credit markets have also rallied notably, with investment grade spreads tightening by 11bp and high yield spreads by over 50bp. The Treasury market took out 50bp of rate cuts in 2025, leaving market-implied rate cuts by the end of 2026 at around 100bp. The pricing of the trough fed funds rate in the anticipated easing cycle moved up by about 40bp to 3.34%, which we attribute to the market assessing a lower recession probability on the back of the de-escalation announcement.
These moves across markets are significant. To put them into perspective, we dig into what the 90-day détente in trade tensions implies and what it does not, sketching out the implications for the economy and markets.
