US-China talks – Looking for breakthrough
This week, U.S. and Chinese officials are set to meet in Geneva from 9 to 12 May, marking the first high-level trade talks since tariffs escalated to 145% on U.S. imports and 125% on Chinese goods. U.S. Treasury Secretary Scott Bessent will lead the American delegation.
President Trump had stated that he would not reduce tariffs unilaterally, while China insisted on tariff relief as a precondition for progress. Last Thursday, President Trump struck a more conciliatory tone, suggesting that in the short term, tariffs on China may be lowered, although they would remain at a high absolute level.
On the same day, Trump announced a deal with the UK confirming a 10% baseline rate, with some reductions applied to cars, aluminium, and steel. While this is overall positive news, particularly since the deal will limit the direct negative impact from tariffs and could help mitigate some of the rise in uncertainty in the UK, the deal still leaves tariff rates substantially higher than before.
Fed – Wait and see
The Federal Reserve held rates steady at 4.25%–4.5% on 7 May, adopting a cautious “wait and see” stance. Chair Powell emphasised the need for clearer signals from upcoming data before any policy moves. The Fed stressed its commitment to the dual mandate. Powell remarked that the U.S. economy remains strong, with resilient labour markets and solid growth, as per current available data. However, risks from inflation and geopolitical developments were flagged.
The main message was that the Fed is in no hurry to cut rates, and that soft data will be important, but more weight appears to be placed on hard data, where deterioration can take longer to materialise. Markets have responded cautiously, with rates selling off a little bit after Powell’s declarations, as they were in line with expectations but had a slightly hawkish tone. Right now, two cuts are priced in during the next four meetings and a cut in June is seen with a 20% probability.
Global monetary policy – Easing spree
This week, the People’s Bank of China (PBoC) cut its 7-day reverse repo rate by 10 basis points to 1.40% and lowered the reserve requirement ratio by 0.5 percentage points, aiming to inject liquidity and counteract pressure from steep U.S. tariffs. It also launched targeted credit support for sectors like tech and elder care, though the overall package and policy communication suggest a measured easing approach that is not enough to revive domestic demand. In Europe, Poland’s central bank cut its policy rate by 50 basis points to 5.25%, citing falling inflation and weaker data on economic activity, marking its first cut since 2023. However, NBP President Glapinski provided relatively hawkish guidance, describing the cut as an “adjustment.” The Czech National Bank followed with a 25 basis points cut to 3.5%, in line with expectations. On Thursday, the Bank of England cut rates to 4.25%, as expected, but with a split vote and a more hawkish tone than expected that caused UK rates to sell off.
Algebris Investments’ Global Credit Team
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