FinX Wealth Weekly watch 19th May

US-China tariff relief saw markets rally early in the week after both countries agreed to temporarily reduce punitive tariffs, easing tensions and raising hopes of a broader trade resolution. President Trump later warned that not all deals can be reached within 90 days and that he would announce new tariff rates in the next 2-3 weeks.

US data included below-forecast inflation and weak survey data. US credit rating by Moody’s downgraded US Treasury debt due to large fiscal deficits, independently of House Republicans disagreeing on a tax proposal.

Geopolitical tensions persisted as Russia-Ukraine talks failed to make meaningful progress.

Australia’s economy has produced solid employment gains and rising wages, but signs of deceleration support an expected RBA rate cut this week. The PBOC is also likely to cut prime rates tomorrow.

Global equities rallied on Monday on renewed optimism surrounding US-China trade relations. Following high-level talks in Switzerland, both nations agreed to reduce punitive tariffs by 115% for 90 days. This partial reversal of the previous 145% levies - tantamount to a trade embargo - marked a significant thaw. Ports on the American Pacific coast have reported a sharp decline in freight volumes in recent months, underscoring the economic impact of the earlier measures. While the new arrangement reduces US tariffs to 30% and maintains China’s at 10%, markets responded positively to the possibility of further negotiation. President Trump heralded the outcome as a “total reset,” claiming Beijing had pledged to eliminate all “non-monetary barriers”, although this has yet to be substantiated in policy terms.

Still, the optimism was tempered by comments from Treasury Secretary Bessent, who emphasised that the tariff reductions apply only to bilateral measures and exclude broader sectoral duties imposed on other trading partners. He also noted that it is “implausible” for US tariffs on China to fall below 10% in the foreseeable future, reinforcing investor caution about the depth and durability of any trade détente. Trade volumes are expected to remain below pre-April levels, even under the revised tariff schedule.

The US is in dialogue with South Korea, Japan, Vietnam, India, and the European Union. However, President Trump warned that the compressed timeline makes it impossible to conclude talks with every partner within 90 days. Investors are now watching for revised tariff schedules expected within the 2-3 weeks, hoping for softer measures than those announced in early April.

In Europe, resistance to a US-UK-style agreement was clear. EU ministers rejected the framework that left 10% tariffs intact, with Sweden’s Benjamin Dousa warning of potential countermeasures. While the EU is willing to reorient trade away from China in strategic sectors, it remains firm on defending its tax and regulatory autonomy, including VAT and digital levies. The European Commission is preparing a new €95bn retaliatory tariff package targeting high-profile American exports such as aircraft and whiskey.

Japan signalled it may delay a deal with Washington unless the US lifts its 25% tariff on Japanese autos. Prime Minister Shigeru Ishiba, under domestic pressure, is keen to avoid political fallout and is prioritising a bilateral agreement that avoids undermining Japan’s strategic relationship with the US. Q1 GDP fell short of estimates at -0.2% on Friday.

In US macroeconomic data, April inflation figures were below consensus expectations. Nevertheless, inflation expectations remain elevated.

Major retailers like Walmart confirmed plans to pass increased input costs on to consumers, despite criticism on social media from the president. Sales have significantly slowed post the March pickup as retailers bought forward purchasing requirements to beat the tariffs .

Consumer sentiment softened further, with the University of Michigan index falling to its second-lowest reading on record, and the NFIB Small Business Optimism Index declining for a fourth consecutive month, continuing its post-election retracement.

The president spent the week in the Middle East negotiating oil supply assurances to avoid further pressure on energy prices. Speculation that he would attend the Turkey-hosted peace talks between Russia and Ukraine proved unfounded. While Ukraine’s President Zelenskyy was present, Russia’s leader declined to participate. The talks yielded an agreement to exchange prisoners, but no breakthrough on a ceasefire, leaving the broader conflict unresolved. Trump is expected to speak with both sides this week, as well as NATO allies.

Returning to Washington, the president faced a setback as his proposed extension of the 2017 tax cuts failed to clear the House Budget Committee, with several Republicans demanding accompanying spending cuts. Later that day, Moody’s downgraded the US sovereign rating, echoing earlier moves by the other major ratings agencies. Moody’s cited sustained fiscal deficits, mounting debt, and a growing interest burden. Yields on 10yr Treasuries rose to 4.49% following the announcement, and S&P 500 ETFs slipped -0.6% in after-hours trading.

In more positive domestic news, Australia reported robust employment data for April, with a net gain of +89k jobs and the unemployment rate steady at 4.1%. Wage growth accelerated to +3.4% year-on-year. However, broader indicators such as underutilisation and hours worked suggest that labour market momentum may be peaking. The NAB business surveys also point to decelerating private-sector activity. Markets have fully priced in a -25bp rate cut by the Reserve Bank this week, bringing the cash rate to 3.85%. The RBA’s updated Statement on Monetary Policy, released alongside the decision, will include firmer fiscal assumptions following the recent election.

The PBOC is also expected to cut prime interest rates by -0.10% after today’s monthly update of activity data. The global flash PMIs follow on Thursday.

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