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Recent trade policy updates have highlighted how quickly economic rules can bind U.S. policy changes when facing disruption. Last week, U.S. stocks rebounded and are now down less than 3% since the April 2 tariff news. U.S. 10-year yields fell but remain significantly higher than their April lows.

This week, attention turns to April U.S. jobs data for early signs of how recent tariff announcements are affecting business confidence and hiring decisions. Two key economic rules are binding on attempts at abrupt U.S. policy changes: financing debt and supply chains. Supply chains, in particular, cannot be rewired quickly without major disruption. Signs of the U.S. softening its trade stance on China indicate that these rules are starting to bind as negotiations take shape. As a result, U.S. policy is expected to settle down over the next six to 12 months, with developed market stocks remaining positive but experiencing near-term volatility.

U.S. stocks rose from their April lows last week as the U.S. showed signs of potentially softening its trade stance on China. This demonstrates how economic rules can limit what is possible in trade negotiations. Decoupling from China, bringing production to the U.S., and diversifying supply chains are strategic priorities for the U.S. However, global supply chains cannot be quickly rewired without significant disruption. China remains a key supplier of critical minerals, semiconductors, industrial parts, and auto parts. U.S. imports of computers and electronics are larger than total U.S. production of these items, highlighting the deep economic interdependence.

Tariffs could increase costs, reduce access to key inputs, and halt production. A cooling U.S. stance on tariffs points to growing awareness of the risks tied to a supply shock. U.S. stocks jumped more than 4% last week, driven by tech, and are now up 14% from a 14-month low. However, uncertainty over tariffs has led many companies to withdraw or soften earnings guidance. U.S. 10-year yields fell to near 4.25% but are still up about 40 basis points from their April low. The U.S. dollar inched up from three-year lows against major currencies.

Big questions remain about the damage tariffs could cause, even if economic rules mean it will take time to uproot current trade relationships. There is concern on the supply side, as disruptions could lower productivity and growth, similar to the pandemic shock. Long-term capital spending could also be affected by uncertainty, as seen after the 2016 Brexit vote. Indicators such as capital spending plans, consumer confidence, high-frequency data on port traffic, and early reads on trade flows are being monitored to gauge the potential impact.

Closer to home the ASX 200 has rebounded back above 8,000 points up since the April 3rd low of 7,343.

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