- The risk of a trade war between the US and China fell after Trump’s speech.
- The president called on central banks like the Fed to lower interest rates.
- US data revealed that unemployment claims rose from 217,000 to 223,000 last week.
Interest futures pulled back from recent peaks as risk appetite improved, sending investors to riskier assets like equities. Nevertheless, bullish sentiment remained strong. Risk sentiment shifted after Trump assumed a softer tone regarding Chinese tariffs and called on the US Federal Reserve to lower borrowing costs.
US Treasury Index (Source: Bloomberg)
On Thursday, the risk of a trade war between the US and China fell after President Donald Trump hinted at possible trade negotiations. Such an outcome would mean no tariff on Chinese goods and peace between the two countries. As a result, risk appetite improved.
At the same time, Trump failed to give any further guidance on the 25% tariff proposal for Canada and Mexico. The thought that these tariffs would be immediate has supported Treasury yields and weighed on interest futures in recent weeks. However, the lack of clarity since Trump took office has indicated a softer-than-expected approach.
Meanwhile, the president also called on central banks like the Fed to lower interest rates. These comments boosted risk appetite because low borrowing costs will likely improve the business environment. Nevertheless, there is still a risk that the Fed will keep borrowing costs elevated this year. If Trump implements tariffs on imports, demand for local goods will increase. At the same time, price pressures in the country will jump. In this case, the Fed would be forced to keep rates high.
Elsewhere, data from the US revealed that unemployment claims rose from 217,000 to 223,000 last week, indicating softer labor market conditions. The US Central Bank is paying close attention to the labor market. Weakness increases expectations for rate cuts, leading to a drop in Treasury yields and a rally in interest futures.
Next week, the Fed will meet, and experts believe policymakers will vote to keep interest rates unchanged. Therefore, traders will pay more attention to the messaging regarding the future. Recent policymaker remarks have shown some support for more rate cuts this year.
Notably, Christopher Waller said that the central bank could still cut rates three or four times this year. More such remarks will weigh on Treasury yields, allowing interest futures to climb. On the other hand, policymakers might remain cautious due to uncertainty regarding Trump’s policies. In this case, interest futures would fall.
