President Trump Remains Optimistic About China Negotiations

Rates fall as US-China discussions commence. Lower than expected inflation expectations data fueled a decline in Treasury yields today, with markets betting that the Fed will be able to focus on the employment side of its dual mandate. US-China trade deal momentum may have also contributed, as reduced tariffs could mean lower long-term inflationary pressures. Yields declined 3-4 bps across most of the curve, a slight reversal of Friday’s 8-13 bp rise. 2-year and 10-year yields are now 4.00% and 4.47%, respectively.

Inflation expectations decline sharply. NY Fed survey data released today showed that 1, 3, and 5-year inflation expectations decreased in May. The decline was sharpest for year-ahead data, where the 3.2% May print was well below the 3.50% forecast and 3.63% in April. The survey came after the US announced trade deals with China and the UK, which spurred optimism that tariff-driven price pressures may be lower than anticipated. The data also comes ahead of US CPI on Wednesday, where core readings are expected to rise by 0.1% in May from April.

China-US trade talks to continue tomorrow. After last week’s call between President Trump and President Xi spurred optimism about impending trade deals, representatives from both nations met in London today to continue conversations. Trump stated at the White House today that “We are doing well with China. China’s not easy… I’m only getting good reports.” China is aiming for reduced restrictions on tech exports, including chips, while the US has cited eased limits on rare earth shipments as a critical goal. Kevin Hassett, head of the White House’s National Economic Council, stated today the administration expects that “after the handshake” in London, “any export controls from the US will be eased and the rare earths will be released in volume” by China.