US-China trade update

US President Donald Trump and Chinese President Xi Jinping concluded their long-awaited meeting in Busan this week, resulting in a positive outcome with headline wins on both sides. The talks produced several rollbacks on major curbs including tariffs, port fees, export controls, and sanctions. 

These developments signal a pause in tensions between the two countries. But the emphasis is more tactical than structural, aiming to stabilise ties rather than redefine them. Unlike earlier ASEAN partner meetings, there was no joint statement - nevertheless, both sides issued consistent remarks afterward, reaffirming a positive tone and an intent to follow through on the deal. 

The key developments were as follows:

• Trade and tariff truce extended: US cut fentanyl tariffs on China from 20 per cent to 10 per cent and extended the current 10 per cent reciprocal tariffs for another year (set to expire on November 10^th). This reduces China’s effective tariff rate (ETR) from around 41 per cent to 31 per cent - still nearly double the average across other Asian partners. The US also agreed to suspend the “50 per cent rule” that extended sanctions to subsidiaries of blacklisted firms. In return, China will defer its rare-earth export controls (and related measures announced on October 9^th) for one year and resume soybean purchases, providing modest relief to US farmers.
• Postpone port fees: Both sides agreed to suspend their port levies for a year.
• Technology and TikTok: Progress was also made on the TikTok divestment, but the details were left unsettled. There seemed to be limited agreement on semiconductor access, with the Blackwell chips not part of the discussion. 

Reaching a consensus on stability

The year-long truces and their accompanying agreements offer a greater degree of stability and less uncertainty over the near to medium term compared to the previous 90 day pacts, assuming the commitments hold. The meeting broadly met expectations of a positive truce and moderate de-escalation. As such, the market response has been largely muted, reflecting the fact that many of these concessions had been trailed in the run up to the meeting. 

Presidents Trump and Xi also agreed to re-establish regular cross-level communication channels to prevent unintended escalations. In our view, this paves the way for a new norm of managed conflict. Both presidents explained their intention to arrange more meetings next year to maintain the open dialogue. President Trump hinted at a possible trip to China in April next year, further assuring the market that the two sides will keep their communication open and the relationship stable. 

However, the talks did not address deeper structural issues around technology security, energy alignment with Russia, or Taiwan policy. This reinforces our medium-term view of global fragmentation. 

US Federal Reserve: Dovish tilt despite Powell’s claims otherwise

The US Federal Reserve cut rates by 25 basis points (bps) as expected, taking the Fed funds target range down to the 3.75 - 4.0 per cent range. The accompanying statement reiterated the Fed’s downside labour market concerns, explaining that “risks to employment rose in recent months”, while describing inflation only as “somewhat elevated”.

This dovish reaction function was also underlined by the decision to end quantitative tightening (QT) earlier than anticipated, on December 1^st. Most analysts had previously expected an announcement concerning the end of QT at the December Federal Open Market Committee (FOMC) meeting, but recent stresses in funding markets have clearly made the committee nervous about additional interest rate volatility, driven by slight reserve scarcity. Taken altogether, these moves demonstrate the extent to which this Fed has pivoted its focus towards supporting the labour market.

In the press conference, however, Chair Jerome Powell moderated some of this dovish signalling, describing a rate cut in December as “far from” a forgone conclusion, which jolted markets out of complacency about a fully-priced further cut in rates. Powell also pointed to the two dissents on today’s decision, in both directions, as further indication that the Fed is not “on a preset course“. He reiterated this hawkishness by suggesting the data uncertainty from the government shutdown may warrant caution over a December cut.

Looking ahead, we expect this lack of data to manifest dovishly despite Chair Powell’s insistence that it raises questions over the next rate cut. The reduced data flow both masks the effects of previous DOGE layoffs, and will start to produce its own negative growth effects as the shutdown continues. In all, these dynamics combined with the dovish move to end QT earlier than expected means we expect one additional cut by the end of the year.

Bank of Japan: Ueda protests too much

The Bank of Japan (BoJ) today kept its policy rate unchanged at 0.5 per cent with two dissenting votes, in a repeat of September’s meeting. Hajime Takata and Naoki Tamura remained the two hawkish members voting for a hike to 0.75 per cent, arguing that the risk to prices is skewed to the upside and that the BoJ should lift its policy rate closer to neutral. This sense of continuity followed through into the Bank’s Quarterly Outlook Report, with expectations for GDP and inflation remaining largely unchanged for this year and next. Finally, the BoJ continues to see the risks to prices as balanced in either direction. 

In the press conference, BoJ Governor Kazuo Ueda attempted to tamp down expectations of rate hikes soon. He argued that he didn’t believe that risks of “falling behind the curve” are rising and placed much more emphasis on next year’s Shunto wage negotiation results as guiding data. This was clearly a way of downplaying the possibility of a rate hike in December or January, given the full results of Shunto wage negotiations will not be released until spring next year. 

However, like Chair Powell, we believe Governor Ueda is overexaggerating the need to be cautious around the near-term outlook for rates. Much like Powell, Ueda put a lot of emphasis on uncertainty around the near-term outlook to justify moving slowly. However, we expect a lot of the uncertainty surrounding the fiscal/external trade/data complex to have clarified by the December meeting and generally tilt in favour of a hike. We also see the risks on the inflation front as tilted to the upside. Food costs, driven by higher import prices because of a weaker Yen, will lead to higher inflation than the BoJ is currently expecting for this year. As a result, we believe this all crystalises the need for a hike sooner rather than later.

European Central Bank: Cutting cycle appears to be over

The European Central Bank (ECB) left interest rates and forward guidance unchanged as expected on Thursday, meaning the Bank is sticking to its key message of remaining data-dependent and taking a meeting-by-meeting approach. There was little to shift pre-meeting monetary policy expectations.

Of interest was the message around euro area growth resilience and the fact that recent trade developments and the ceasefire in the Middle East had mitigated some downside growth concerns. Taken together, this may point to an improved growth outlook relative to the September forecasts that undershot GDP in Q3. This meeting has added to the ECB’s recent "good place" mantra.

On inflation, two side risks continue to be carefully emphasised as the ECB balances what it sees as upside risks from a stronger euro and potential over-supply of imports, against potential upward pressure from fiscal stimulus and a fragmentation of global supply chains.

Indeed, it’s becoming increasingly clear that the bar for another rate cut has risen higher than markets are currently pricing, with an increasingly narrow path that would require faster than expected disinflation alongside evidence of impairment to the transmission mechanism. The fact that ECB President Christine Lagarde said that transmission is seen as effective, despite recent surveys and the ECB’s own analytical models suggesting that financial conditions are tighter than expected, reinforces the high bar to cut. As a result, we believe we have now reached the end of the cutting cycle.