US asset markets look ahead to trade talks between the US and China. US claims ‘substantial progress’ in the negotiations. Chinese exports were surprisingly strong in April. Currency markets subdued overall

US asset markets were largely in a holding pattern into the weekly close ahead of the first official trade talks between the US and China in Switzerland. US equities and treasury yields ended the session little changed with limited first tier economic data to provide the market with direction. European equities advanced. The Dax index in Germany has fully retraced its April drawdown and closed above its previous March peak.

US Treasury Secretary Bessent said there had been ‘substantial progress’ in the two days of talks with China and that further details would be shared today. President Trump had earlier sounded positive about the talks in a post on social media. He said there were many things discussed and agreed on. Risk sensitive assets have unwound the losses, following the reciprocal tariffs were announced, reflecting optimism about a de-escalation.

China’s trade data for April was closely monitored given it captures the initial period after the trade war escalation. China's exports surprisingly increased 8.1%, which was above the consensus forecast, despite a 21% drop in shipments to the US. China’s increased exports to India, Southeast Asia and the European Union helped to compensate for the decline in US exports.

The trade data only captures the initial period after prohibitive tariffs came into force, with their effects likely to become more pronounced going forward. A decline in exports would make it harder for China to meet its 5% official growth target. In 2024, exports made up roughly one-third of China’s GDP growth.

The market pared Fed rate cut expectations at the margin with Fed speakers echoing Chair Powell’s patient message on rates from the FOMC. There is around 66bp of easing priced by the end of the year. This is the least number of cuts priced since reciprocal tariffs were announced and compares with ~100bp at the beginning of the month. 2-year treasury yields closed 2bp higher at 3.89%. The curve had a modest flattening bias with 10-year notes closing unchanged at 4.38%.

The US dollar index ended the week modestly lower compared to the NZ close on Friday albeit having recovered off the session low. The pound was the strongest amongst the major pairings while the euro and yen ended marginally higher. The NZD ended little changed against the US dollar and on the major crosses, except for NZD/GBP, which dipped towards 0.4440.

The Canadian dollar underperformed after labour market data was weaker than expected. The unemployment rate rose to 6.9% with the market pricing an increased chance of a 25bp rate cut by the Bank of Canada in early June.

Consumer prices in China fell for the third consecutive month in April. CPI fell at a 0.1% annual rate amid weak domestic demand. Producer prices have been falling for almost three years. Deflationary pressures are likely to remain as the economy faces additional headwinds from the trade war. Chinese authorities announced a range of measures to provide support last week including a rate cut and reducing banks’ reserve ratio requirements.

The NZ fixed income market moved higher in yield to start the local session on Friday reflecting moves in global markets. However, after the initial selloff which saw swap rates marked 6bp higher across the curve, the market reversed lower with no apparent catalyst. 2-year swap rates closed 2bp higher at 3.08%.

There was similar price action in NZ government bonds with an initial move higher in yield reversing course. NZGBs outperformed US treasuries. The 10-year spread compressed to 15bp by the local close. The 10-year benchmark yield ended the session 3bp higher at 4.48%.

Australian 10-year government bond futures little changed since the local close on Friday, suggesting limited directional bias, for NZ yields on the open.

This note is from BNZ Research and re-posted with permission. The original is here.