US-China Trade Talks Resume, US Jobs Data Impact Markets | Bloomberg Daybreak Asia

US-China Trade Talks and Critical Minerals

• 🇺🇸🇨🇳 US and China are set to resume trade talks in London, with the goal of restoring the flow of critical minerals.
• 🤝 President Trump and President Xi agreed to have senior officials meet to resolve issues related to these exports.
• 🇨🇳 Beijing has approved some applications for rare earth exports, though details remain scarce.

Market Reaction to Tariffs and Uncertainty

• 📈 Market volatility in both equity and bond markets is attributed to the uncertainty surrounding the tariff situation.
• 📉 Interest rates have risen significantly since tariff discussions began, and this trend is expected to persist until more clarity emerges.
• ⚠️ Tariffs are anticipated to be somewhat inflationary over time, potentially leading to higher-for-longer inflation as supply chain issues develop.

Economic Data and Federal Reserve Outlook

• 📊 Upcoming CPI and PPI reports will provide the Fed with its last look at inflation before the June 17-18 meeting.
• 📉 A flat to slightly higher inflation reading could edge interest rates higher, with no expectation of plummeting rates.
• 🏢 Companies, like major retailers, may soon have to pass on higher import costs to consumers after absorbing them for a period.

Bond Market and Equity Opportunities

• 📈 Higher interest rates are expected due to the inflation picture and upcoming supply issues, with the 10-year Treasury potentially retesting previous highs.
• 🎢 The equity market is seen as closer to its peak than a significant sell-off, with opportunities in defensive sectors like utilities and consumer staples.
• 🏦 Financials are also expected to perform better due to a steeper yield curve, benefiting banks' ability to monetize interest rates.

AI Trade and Global Economic Divergence

• 🤖 The AI trade has long-term upside potential but is experiencing ebbs and flows, with potential for retracement and re-pricing.
• 📉 US-China trade talks may offer temporary relief on export controls, but a comprehensive agreement is unlikely in the near term.
• 🇨🇳 China continues to face deflationary pressures and subdued domestic demand, while the US may see creeping inflationary pressures.
• 🇯🇵 Japan's economy faces challenges with weak exports, potentially requiring additional fiscal stimulus and leading to increased JGB supply.