Daily Economic Update

US-China: Initial talks result in a substantial drop in tariffs with markets cheering the major de-escalation. The two countries agreed to slash the prohibitive tariffs they imposed on each other and will establish a mechanism to continue discussions about economic and trade relations. Effective 14 May and for a period of 90 days, US tariffs on Chinese imports will drop from 145% to 30% while Chinese tariffs on US imports will drop from 125% to 10%. We note that, given the wording of the agreement, and assuming no further developments in the interim, which is actually unlikely, US-imposed tariffs will increase to 54% and China-imposed tariffs to 34% by the end of this 90-day period. Importantly, China agreed to “suspend or remove” its non-tariff countermeasures that it imposed since April 2, which would include the export restrictions on several rare earth elements. These restrictions were expected to inflict significant disruption to certain US industries, such as defense, automotive, and energy. Overall, this is another major de-escalatory development that is a step in the right direction, and, in effect, it showed that the world’s two largest economies are both set to lose in a big way from a trade war between them. Therefore, this should increase the chances of further progress in the interim 90-day period as the two countries attempt to reach a wider trade framework or agreement. In addition, the hope is that this de-escalatory approach will continue to prevail in the US’s negotiations with its other major trading partners. Markets cheered the major breakthrough with global equities rallying, the US dollar index strengthening, and US bond yields rising likely reflecting a drop in recession risks. Specifically, the S&P 500 jumped 3.3% yesterday while Chinese offshore (Hong Kong) stocks rallied 3% and Europe’s STOXX 600 gained 1.2%.

Japan: BoJ’s summary of opinions confirms cautious stance amid the external headwinds. Bank of Japan (BoJ) board members’ assessment was that the economic recovery remained fragile given signs of weakness in the exporting sector, according to the released ‘Summary of Opinions’ for the 30 April-1 May meeting. Board members also noted that the economic outlook has been significantly clouded by rising global trade tensions, particularly the imposition of US tariffs, which are expected to weigh on corporate sentiment and household consumption. Meanwhile, the recent appreciation of the yen is expected to exert downward pressure on prices. Nevertheless, members noted that domestic factors, including the tight labor market and sustained wage growth, could help anchor inflation expectations, with underlying CPI projected to gradually align with the 2% target over the medium term. The BoJ is expected to continue adopting a cautious and data-dependent approach given the high uncertainties amid the trade negotiations with the US and the upcoming upper house parliamentary elections in July.

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