China Trade-Talk Progress Remains Unclear

Rates fall after China denies negotiations with U.S. Just a day after President Trump fueled a risk-on session with optimistic comments about negotiations with China, Beijing denied that talks had commenced. The policy-sensitive 2-year yield (3.80%) declined 7 bps with markets betting that prolonged U.S.- China tensions could drive the Fed to cut rates earlier than anticipated. Cleveland Fed President Beth Hammack and Fed Governor Christopher Waller also contributed to the decline after both offered dovish comments. Meanwhile, bets for more aggressive monetary easing fueled an equity rally, with the S&P 500 and NASDAQ up 2.03% and 2.74%, respectively.

Fed officials hint at rising odds of rate cuts. Fed Governor Waller is much more concerned about a potential U.S. economic slowdown than tariff-driven price pressures. He stated today that “I’m willing to look through whatever tariff price effects there are… I’m not going to overreact to any increase in inflation that I think is attributable to the tariffs.” Conversely, he appears to be much more sensitive to the employment side of the Fed’s mandate, as he argued that “I would expect more rate cuts, and sooner, once I started seeing some serious deterioration in the labor market.” Meanwhile, Fed President Hammack argued that “If we have clear and convincing data by June, then I think you’ll see the committee move…at that point in time.” Fed Funds futures-implied odds for a rate cut by June’s FOMC meeting jumped to 65% versus 57% as of yesterday’s market close.

U.S. and China disagree on state of trade talks. The latest in the U.S. – China trade war features both sides contradicting each other regarding the status of trade discussions. President Trump has been adamant that the U.S. and China have met on trade, with the President saying, “…we’ve been meeting with China,” and further specifying to reporters that the two nations met early this morning. On the other hand, He Yadong, the Chinese Commerce Ministry spokesman, said today that “any reports on development in talks are groundless.” China continues to maintain its position that the U.S. must include the removal of all unilateral tariffs on China as part of trade discussions. Despite the back and forth, President Trump has remained optimistic about the prospect of easing trade tensions with China.