Traders Hesitate Ahead of US, China Talks: May 9, 2025

Markets are muted ahead of a significant weekend featuring high-level trade discussions between the world’s two largest economies. And just as leaders from Washington and Beijing gear up for their Geneva meeting to carve a path forward on the heels of the US and UK coming to an accord, President Trump remarked that many other negotiations are nearing completion. But the morning bullishness in response to the Head of State’s optimism was temporary, as investors realize the pivotal impacts of the China talks and the crucial short-term effects on S&P 500 earnings expectations. Meanwhile, the economic calendar was quiet with a few Fed speakers pointing to uncertainty on price pressures, employment conditions and growth overall while also discussing the importance of the central bank’s independence and the lingering influence of the COVID-19 pandemic on the economy. Participants are responding to the developments without much conviction as asset prices shift modestly. Folks are trimming equity holdings in most sectors and reducing exposure to the greenback in favor of Treasuries across the curve, commodity futures and forecast contracts.

Fed Speakers Opine on Economy and Role of the Central Bank

With the quiet period during the days leading up to this week’s Federal Reserve meeting over, policymakers were out in force this morning, providing insights into the economy and the relationship of the central bank and the executive branch. Here are a few highlights:

• Fed Bank of Richmond President Tom Barkin, at the Loudoun Chamber’s PolicyMaker Series presentation, said some companies believe that consumers are financially tapped out, so passing tariff costs onto households could be difficult. For now, however, he believes the economy is solid as illustrated by business investment and retail spending. The latter item, he added, has been resilient even as sentiment has plummeted.
• Fed Bank of Chicago President Austan Goolsbee said the central bank is being vigilant regarding price pressures and is striving to reduce inflation to 2%. Speaking at a Fed Listens event, he opined that the economic impacts of the Covid-19 pandemic are still relevant.
• Fed Governor Christopher Waller emphasized the need to maintain the Fed’s independence. At the same time, the staggered schedule for Presidents to appoint Fed members allows for each White House occupant to influence the organization, which provides electoral accountability. He maintains studies have concluded that preventing central bankers from being fired over policy disputes has resulted in lower interest rates.
• New York Fed President John Williams said he believes the central bank will achieve its 2% inflation goal and that price stability is foundational for the organization. During his presentation at the Reykjavík Economic Conference in Iceland, he maintained that accountability and independence, transparency, and well-anchored inflation expectations are crucial to the Fed’s work in maintaining stable prices. These factors, which are mutually reinforcing, are highly important during this period of “great uncertainty and change.” He also added that uncertainty is the only certain feature of monetary policy.

Binary Weekend

This weekend’s developments will probably be binary for markets but don’t expect a quick resolution to US-China trade tensions just yet. I’m expecting many ups and downs going forward as Washington and Beijing make attempts to meet in the middle while also looking to secure their own economic interests. Trump 1.0 was an example and many of those disagreements remain unresolved today, almost a decade later. Meanwhile, inking some agreements with other foreign partners in addition to the UK would put pressure on the Chinese to play ball with the US Commander in Chief. For now, however, all eyes are on Geneva, and heightened confrontations are likely to weigh on equities in the short-term, but rising collaboration would serve to bolster enthusiasm.  

International Roundup

China Turns to Asian Trading Partners

China’s trade surplus dropped from $102.6 billion in March to $96.2 billion last month, beating the median projection of $89 billion. Imports shrank 0.2% year over year (y/y), better than the expectation for a 5.9% dip and March’s 4.3% fall. Meanwhile, export growth moderated from 12.4% y/y in March to 8.1% last month but was stronger than the consensus estimate of 1.9%. With US tariffs pressured orders for Beijing’s products, exports for American buyers fell 21% y/y, but the world’s second largest economy was able to find new markets, with shipments to other Asian countries growing. The recent overall decline comes after a 9.1% gain in China’s exports to the US in February, which is commonly attributed to importers rushing to build inventory before levies went into effect.

Japan Consumer Spending Exceeds Expectations

Household spending in Japan was stronger than expectations in March, but wage growth fell beneath estimates. Consumer outlays climbed 0.4% month over month (m/m) and 2.1% y/y compared to projections calling for a monthly drop of 0.5% and a small 0.2% gain on the annualized figure. The m/m metric weakened from 3.5% in February, but the recent y/y result was a reversal from the prior month’s 0.5% decline.

Overall wages, however, were up only 2.1% in March, falling below both the estimate of 2.3% and February’s 2.7% gain.

Canada’s Unemployment Rate Moves Higher

Canada’s number of working individuals barely expanded in April and an uptick in its labor force caused the country’s unemployment rate to increase from 6.7% to 6.9%, which exceeded the consensus forecast of 6.8% and was the highest level since January 2017. Total full-time workers increased by 31,500 following a drop of 62,000 in March. Conversely, the part-time segment contracted by 24,200 after climbing 29,500 in the preceding month. The average hourly wage gain of 3.5% year over year for permanent employees was unchanged from March. The recent national election contributed to a in payroll bump in the public administration category. Real estate, finance, insurance and the leasing categories also added positions. Meanwhile, the cyclical manufacturing and wholesale/retail sectors reduced rosters by a whopping 57,400 as the trade war with the US weighs on employment conditions and economic activity. Odds for a cut at the Bank of Canada’s June meeting rose because of the weak performance.

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