The Week Ahead

The Week Ahead: US/ China trade talk success

Financial markets are in optimistic mood on Monday, as China and the US both announced that weekend trade talks had made ‘substantial progress’. A press conference is set to take place this morning, and the market is primed for a dramatic cut in tariff rates between the two nations.

US stock market futures are surging early on Monday, the Hang Seng is also up by more than 1% at the start of this week. The  market has been promised more detail on the  outcome of these talks later today, and expectations are high that they will include a large drop in trade tariffs from both nations, as well as crucial detail about how the trading relationship between the two countries will heal and develop under the Trump administration.

A fluid US trade policy is good for risk

Anything less than the above could curb the market’s enthusiasm for any trade pact.  The US delegation have stoked markets for a positive outcome, after they said that ‘differences were not as large as thought’. For now, risk appetite is high since the US trade policy looks fluid. Stocks are higher, gold is down more than $50 per ounce so far on Monday, Treasuries could come under pressure at the open, as the market ditches safe havens and prices in the prospect of a recovery in US GDP,  and the dollar index is higher, especially vs. the yen, the Swiss franc, and the euro. The dollar is weaker vs. the Chinese yuan, the Aussie, and the Kiwi dollar, as currencies that are linked to China also receive a boost from the trade talks. Ahead of these talks, both sides said that the meeting would not lead to a trade deal, although the US side said that they were aiming for tariffs to fall below 60%. This is still an extremely high trade levy, which could weigh on growth. If tariffs are reduced to this level, the hope would be that conversations between the US and China will be ongoing to reduce these levels even more.

Will corporate forward guidance become clearer?

The markets are desperate for clarification about US and Chinese trade relations, the risk is that the press conference does not deliver the level of detail that the market craves. This press conference is also critical to help companies predict their future earnings. Many  US corporates have avoided giving forward guidance in the Q1 earnings season due to uncertainty about the trading relationship with China. If trade relations improve, then we could see a wave of US companies release delayed  forward earnings guidance in the coming weeks, which may also boost sentiment.

Fiscal risks come to the surface in Japan

For now, markets are optimistic. USD/JPY is  testing the 50-day sma at 146.00, a break above this level could lead to further gains vs. the USD. The yen is weakening even though the Japanese 30-year bond yield has surged to its highest level in 25 years. The 30-year yield is  surging towards 3%, as risk sentiment rises and concerns grow about fiscal expansion in Japan. A mixture of tariffs and fiscal risks are weighing on the long end of the Japanese bond market. A 30-year Japanese bond auction on Tuesday, will be closely watched for demand levels, after a weak 10-year bond auction. There isn’t concern, yet, about a fiscal crisis in Japan, but this is worth watching, especially as the yen is looking weak from a technical perspective.

Pharma: Trump’s next target

Trade risks may have moderated, but they have not gone away. India and Japan are now negotiating with the US to secure trade deals, and the EU is also lagging in trade negotiations. Pharma could be at risk later this week. The US President said that he planned to cut US prescription drug prices , which is also set to be announced later today. The focus will be on European pharma stocks, which could come under pressure on Monday. This announcement could impact EU/ US tariff talks. Will the US President use price caps on pharma imports rather than tariffs to reduce the cost for US patients? If yes, this could have big ramifications for pharma companies and their profits in Europe and elsewhere. Thus, we could see some downside for the likes of Astra Zeneca, GSK and Novo Nordisk later on Monday.

Last week was all about central banks and tariff talks, this week tariff talks are still central to financial markets, but key economic releases in the UK and the US will also be worth watching. Below we look at three key events that you do not want to miss.

1, US CPI

The US CPI report for April will be critical to determine the immediate impact of tariffs on Chinese goods on US inflation. The prevailing narrative is that tariffs will drive inflation higher in the US. However, it may not be that simple. Inflation pressure is expected to remain moderate in April. The headline rate is expected to rise by 0.3%, the annual rate is expected to remain steady at 2.4%. Core inflation is also expected to remain steady at 2.8%.

Although headline inflation is expected remain steady, this will still be a litmus test for the inflationary impact of US tariffs. The monthly rate of headline inflation is expected to rise by 0.3%, a reversal of the -0.1% decline in March. We will be watching closely the sectors that are exposed to China, for example apparel and household furnishings. However, we do not think that April’s prices will truly reflect the impact of tariffs. Prices will take time to adjust, and it is likely that in April retailers were still selling inventory that had been accumulated at the end of 2024 and early 2025, before tariffs on some Chinese goods came into effect in February. Service prices have been trending lower, and we expect that to continue, as demand slows on the back of worries about the economy. Ironically, prices could surprise on the downside, even with tariff risks, as businesses tried to entice consumers to buy products or go out and spend money, in a tough environment.

May’s CPI data could be more useful, since cargo shipments from China started to decline sharply from April, after the 145% tariff was imposed. New tariffs weighed heavily on imports from China to the US last month, which is why May prices could be a better reflection of the impact of tariffs on US price growth.

The risk is for a near term decline in prices due to a fall in consumer demand, which then leads to a surge in CPI growth due to a shortage of goods on the shelves. Adding even more complexity to the outlook, trade talks between the US and China started last weekend, and the market hopes for a dramatic reduction in tariffs that will allow a larger flow of cargo from China to the US in the second half of May.

CPI risks stoking more market volatility

CPI could be volatile over the next few months, and it is unlikely to help relieve the economic uncertainty that is plaguing the US economy, and Federal Reserve decision making. From a trading perspective, the CPI report could trigger more volatility, after volatility has receded in recent weeks. If the US core economic data is impacted by tariffs, we expect a market reaction. Rising volatility is unwelcome news for US stocks, and a higher-than-expected inflation reading could weigh on market sentiment, especially consumer and other cyclical stocks, in particular. The impact on the dollar could be more nuanced. We do think that a rise in inflation will be dollar positive, firstly because inflation could be transitory (for once), and may not lead to a more hawkish Fed, and secondly, because it will remind the market of the economic damage caused by President Trump’s tariffs. The dollar has been negatively impacted by Trump’s tariffs, and it fell sharply in the aftermath of Trump’s ‘Liberation Day’. Thus, signs that inflation is impacted by tariffs is unwelcome news for the USD, in our view. As we mentioned, the USD is making a comeback on Monday, but we think that the buck could be volatile if this CPI report suggests that inflation risks are rising.

2, UK data could boost GBP

The pound could be primed for further gains this week, after it was the best performing currency in the G10 FX space last week, and after the US/ UK trade deal announcement. The Bank of England cut interest rates last week, but they avoided shifting to a dovish stance. Firstly, the vote split suggests that the doves do not have control at the BOE, and secondly, the BOE is still taking a ‘careful and gradual’ approach to future rate cuts. This has protected the downside in  the pound, in our view.

This week the pound could also benefit from economic data. The UK Q1 GDP data could receive a tariff-related boost, with analysts expecting the economy to grow by a robust 0.7% last quarter. This compares with the measly 0.1% increase in Q4 2024. GDP data from the first  quarter of this year is expected to receive a boost from a rush to produce goods to front run US tariffs. There was a significant increase in manufacturing output in Jan and Feb, and we expect this to continue for March. Thus, the UK economy could see a slowdown in production in Q2 as tariff uncertainty surged in April.

Now that the UK has agreed a trade pact with the US, the flow of goods is likely to pick up, however, the threat of weaker global demand could weigh on UK activity. While the UK economy could outperform others in the coming months, growth may still be limited if the US does not strike deals quickly with the rest of the world, especially the EU, which is an-other major trading partner of the UK’s.

Tariffs have complicated the outlook for the UK economy. Strong GDP in Q1 may lead to fears about a slowdown in Q2, which could limit the positive impact on UK asset prices, especially stocks. However, we think that the pound could get a boost this week, with $1.35 now in view vs. the USD. A mix of a less dovish than expected BOE, and strong growth coupled with a trade deal already in the bag with the US, then the pound might be able to extend gains in the coming days.

3, Eurozone industrial production

This is not a data point that we would normally pick out as one to watch. While it is always worth noting how European industrial production is doing, we expect that the March data has the potential to trigger excess volatility. We expect that March industrial production received a boost, as companies tried to front-run US tariffs. The market is looking for growth of 1.6%. vs a decent 1.1% growth rate for February.

Germany has already released its production figures for last month, and it reported a 3% increase, which was led by gains in pharma and in autos, most likely destined for the US market. Already we have seen from the US trade deficit data that pharma exports from Ireland destined for the US reached a record in Q1, and we think that the risk is high for an upside surprise for European industrial production.

The impact of US tariffs is having both an economic impact on the EU, and a massive impact on the euro. Although EU production figures are likely to be huge for Q1, they could fall sharply in Q2, and act as a major drag on growth. The EU is nowhere near getting a trade deal with the US, and although there is a pause on tariffs for now, that will expire in July. We expect European companies to reign in growth from April onwards due to the uncertainty created by tariffs. We expect production to remain lumpy for the foreseeable, with strong production levels in Q1, weakness in Q2, and the potential for another big push in production later this year if the US significantly lowers tariffs.

The market outlook

The economy is not the only area that has been impacted by tariffs, forex volatility has sent the euro flying higher. We do not think that the production data will have a major impact on the euro, and we think that the single currency could still extend gains during this period of tariff uncertainty. The euro was mixed last week, and EUR/GBP sold off sharply, as the UK trade deal reminded the market that a deal between the US and the EU still seems far off.  The euro is lower again on Monday, even though a risk on trade is pushing European yields higher. We think that stronger industrial data combined with a positive outcome from the trade talks between China and the US could help boost European stocks, as the Dax is set to continue to extend gains after making a record high on Friday.