Global markets remain on edge amid President Donald Trump's erratic tariff policy—one moment he grants exemptions, the next he imposes new ones, and the sense of uncertainty keeps growing. Meanwhile, reciprocal tariff negotiations remain ongoing, though there is little hope for any short-term easing of tensions, particularly between the U.S. and China.

On Monday, Trump stated his intention to give automakers more time to shift production to the U.S., noting that his administration was exploring temporary exemptions on tariffs applied to cars and auto parts. Earlier this month, a 25% tariff on imported vehicles took effect, with duties on parts set to be implemented by May 3 at the latest.

Trump's suggestion of temporarily suspending auto tariffs offered a short-lived sign of easing global trade tensions. However, just a day later, on Tuesday, the administration announced new investigations into semiconductor and pharmaceutical imports—opening a fresh front of tariff-related concerns.

By law, the Department of Commerce must conclude the investigation within 270 days, though officials hinted at a quicker outcome. Markets are now bracing for another potential wave of tariff hikes.

The administration views foreign production in the semiconductor and pharmaceutical sectors as a national security threat, and Trump's primary goal with these tariffs is to bring manufacturing back to the U.S. However, analysts warn that reshoring production could take years and involve significant costs. If implemented, these tariffs are expected to raise both input costs and consumer prices.

Particularly, tariffs on semiconductors—key components in chip manufacturing—could impact a wide range of industries beyond tech, from automobiles and aircraft to consumer electronics like smartphones and laptops.

Bridges or Barriers? The Clock Ticks on Tariff Talks

Markets are also closely watching the 90-day pause on reciprocal tariffs for any signs of productive negotiations. While the Trump administration claims to have received proposals from numerous countries, paths toward compromise with major partners like China and the European Union remain fraught. According to a U.S. official speaking on condition of anonymity, most tariffs on the EU are unlikely to be lifted.

Meanwhile, Chinese officials have warned that if the U.S. continues to demand unconditional acceptance of its terms, negotiations will be off the table. The talks could be scrapped entirely if President Trump persists in showing disrespect toward Beijing. Trump, on the other hand, maintains that China must take the first step in the negotiations.

Tensions between the U.S. and China escalated significantly over the past week. The U.S. raised tariffs on Chinese imports to 145%, prompting Beijing to retaliate with 125% tariffs on American goods. These rates are so high that they threaten to bring trade between the world's two largest economies to a near standstill.

In addition, Beijing has taken non-tariff actions such as advising citizens against traveling to the U.S. and halting deliveries of Boeing Co. jets—further deepening the rift. A peaceful resolution seems increasingly out of reach in the near term.

The Cost of Conflict: Inflation Rises, Growth Wobbles

If tensions persist and tariffs remain elevated between the U.S. and China, both economies are likely to suffer. Economists estimate that these trade measures could shave more than 1% off GDP growth in both countries, while also fueling inflationary pressures.

Data released Wednesday showed China's economy grew at a robust 5.4% annual rate in Q1—above expectations—largely driven by a sharp surge in March, possibly reflecting pre-tariff stockpiling. Still, analysts argue that ongoing trade conflicts with the U.S. could weigh heavily on growth in coming quarters.

Moreover, in the U.S., recent data points to slowing economic activity, rising inflation expectations, and growing job insecurity—even before the full impact of record-high tariffs begins to hit the economy. According to figures released Tuesday, manufacturing activity in New York State contracted for a second straight month in April, with outlook indicators deteriorating. The New York Fed's General Business Conditions Index fell to its lowest level since 2001, and producers expect both orders and shipments to decline over the next six months.

Separately, the New York Fed's monthly survey showed that U.S. consumers expect higher inflation over the coming year. One-year inflation expectations rose by 0.5 percentage points to 3.6%, while three- and five-year expectations remained flat. The perceived probability of higher unemployment within the next year also reached its highest level since the pandemic.

Ultimately, Trump's erratic and back-and-forth trade policy is eroding sentiment among consumers and businesses, while also putting the Federal Reserve in a difficult position. If inflation rises while growth slows, the Fed could face a dilemma under its dual mandate.

Waiting for Clarity: Policymakers Pause as Markets Push Ahead

In recent weeks, most Fed policymakers have indicated they would prefer to wait for greater clarity before making any moves. Most recently, Atlanta Fed President Raphael Bostic stated that tariffs are likely to slow progress on inflation, making it more likely that he would support only one rate cut this year, instead of the two he previously expected.

By contrast, Fed Governor Christopher Waller diverged from most of his peers, suggesting that the inflationary impact of tariffs could be temporary. He also said he would be inclined to cut rates sooner or more aggressively in the event of a recession threat.

Despite Waller's remarks, the majority of Fed officials speaking in recent weeks favor holding rates steady for now. As Duhani Capital Research team, we assess that in a scenario where inflation accelerates over the coming months, the FOMC is unlikely to deliver a rate cut before the third quarter—especially considering that uncertainties persist and the 90-day pause is set to expire at the end of June.

Markets, however, are increasingly focused on recession risks and continue to price in more than three quarter-point cuts this year—starting with one expected in June. Additionally, as confidence in the resilience of the U.S. economy faltering, the U.S. dollar has fallen to its lowest level since 2022, and outflows from U.S. assets are intensifying.

As uncertainty and tensions mount, the flight to safety continues. Safe-haven currencies such as the Japanese yen and Swiss franc have strengthened their appeal. Bullish yen bets in the options market have surged to their highest levels since January 2021.

At the same time, gold prices have surged past $3,300 to hit new record highs. The metal has gained nearly 25% year-to-date. Goldman Sachs raised its year-end forecast to $3,700 and sees potential upside to $3,880 under a recession scenario—and even $4,000 by mid-2026.

Oil markets, however, are moving in the opposite direction. Amid weakening demand expectations due to the trade war and anticipated oversupply, WTI crude is trading near its lowest levels in four years.

In conclusion, until there is greater clarity on Trump's economic agenda and its global ramifications, market stability may remain elusive—and demand for safe-haven assets is likely to stay elevated.