- The US president has assumed a softer tone on tariffs.
- China was prepared to exempt certain crucial US imports from the 125% tariff.
- US data showed weaker business activity.
Interest futures extended gains on Friday as sentiment improved amid hopes of a trade deal between China and the US. The likelihood of lower tariffs hurts Treasury yields, boosting interest futures. Meanwhile, market participants are awaiting the release of US inflation and employment figures next week.
US 30-year yields (Source: Bloomberg)
Interest futures have had a bullish week as developments in Trump’s trade policies weighed on Treasury yields. The US president has assumed a softer tone on tariffs, especially those on China. China has also softened since the start of the week, raising hopes for a deal to end the trade war.
Initially, both countries adopted a hard stance, raising concerns about the global economy. Trump raised tariffs on Chinese goods to 145%, while China responded with a 125% tariff. As a result, the uncertainty sent investors away from US assets, hurting interest futures. However, US Treasury Secretary Scott Bessent said this week that the tariffs were unsustainable and had to come down. Reports revealed that the US was ready to lower tariffs to 50% and start negotiations. However, they were not willing to be the first to cut tariffs.
Meanwhile, reports on Friday indicated that China was prepared to exempt certain crucial US imports from the 125% tariff. Hope for an end to the trade war has boosted US markets. However, nothing is set in stone yet. Therefore, market participants remain cautious.
Meanwhile, prices had a brief strong rally at the start of the week as yields collapsed on Trump’s attacks on the Fed. The administration said it was exploring ways to remove Powell from office. According to Trump, Powell was not doing his job of lowering interest rates to support the economy. Therefore, he was demanding a rate cut.
Powell has maintained a cautious tone, waiting for more evidence that the economy needs support. At the same time, policymakers are waiting to see if tariffs have increased inflation. However, prices pulled back after Trump retracted his attacks, stating that he had no intention of firing Powell.
Elsewhere, investors watched US data, which showed weaker business activity. A sharp decline in the services sector dragged down the composite PMI. Traders will now wait for inflation and employment figures coming next week. These will shape the outlook for Fed rate cuts.
