US-China Extend Trade Truce by 1 Year

Yields rise slightly after yesterday’s FOMC meeting. Treasury yields inched higher this morning following the US-China trade truce announcement, though the reaction was relatively muted as the agreement was largely priced in. The move reversed course throughout the afternoon, with yields closing ~2 bps below intraday highs but still up 1-3 bps on the session. The 2-year yield closed at 3.61% and the 10-year yield at 4.10%. Meanwhile, equities retreated, with the S&P 500 and NASDAQ down 0.99% and 1.57%, respectively, led by an 11% drop in Meta as markets worry its heavy AI spending will pay off, with a notable $14.3 billion investment in Scale AI earlier this year.

US and China commit to one-year trade truce. President Trump and Chinese President Xi had a landmark sit down meeting in South Korea, after the two countries reached a one year trade agreement. Under the deal, the US will halve fentanyl tariffs on Chinese goods, dropping them from 20% to 10%, and will also rollback restriction expansions on Chinese companies. In return, China will resume purchasing soybeans and other American agriculture products, as well as pause controls on rare earth exports, which have been a particular point of contention in the two countries’ trade negotiations. The US has agreed to hold off on the 100% reciprocal tariffs threatened by Trump, and reverse port and shipping restrictions on China. China will also suspend shipping regulations for the same time frame. The trade agreement is for one year, and President Trump said he expects an extension upon its expiration, while President Xi called for ongoing dialogue and cooperation on energy, trade, and AI.

Bank of Japan holds rates steady but signals potential near-term hike. The BOJ voted to leave policy rates unchanged at 0.5% today, though two members dissented in favor of a hike to 0.75% for the second consecutive BOJ meeting. In a press conference, Governor Ueda said, “We held today as we want to see more data on domestic wage-setting behaviors, while uncertainty remains high in overseas economies.” Japan nominal wage growth was 1.5% YoY in September, a sharp decline from 3.4% in July, while real wages declined for the eighth consecutive month. Unions are pushing for total pay increases of 5% or more next year to make up the gap. In response to Ueda’s comments, Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and a former BOJ official said, “His various comments hinted that there could be action in the coming months, including his desire to watch the ‘initial’ momentum of the wage increases, not the final results.”