U.S. tariffs on China won’t change again, Lutnick says after trade talks

Economic

Summary:

Commerce Secretary Howard Lutnick assured Americans that U.S. tariff levels on China would not change from this point onwards.President Donald Trump earlier said that U.S. duties on China will total 55%, though a White House official told CNBC that that figure is not new.The announcements from Trump and Lutnick came after trade negotiators for the two economic superpowers concluded high-level talks in London.

Commerce Secretary Howard Lutnick said Wednesday that U.S. tariff levels on Chinese imports will not change from their current levels, even as a trade deal between Washington and Beijing has yet to be finalized.

Asked on CNBC’s “Money Movers” if the current U.S. tariffs on China are not going to change again, Lutnick replied, “You can definitely say that.”

President Donald Trump said in a Truth Social post Wednesday morning that U.S. duties on China will total 55% — but a White House official told CNBC soon after that that figure is not new.

Rather, it comprises the existing 30% blanket U.S. tariffs on China, plus the 25% tariffs on specific products that also were already in place, the official said.

Trump sent his all-caps post hours after Lutnick and other trade negotiators for the two economic superpowers concluded high-level talks in London.

The president said the deal is “done,” but added that it is still “subject to final approval” between himself and Chinese President Xi Jinping.

Trump said China’s tariffs on the U.S. will stay at 10%, where they have stood since both sides agreed last month to temporarily pare back retaliatory duties on each others’ goods.

That 90-day reprieve came after initial talks in Geneva, Switzerland, that yielded a tentative de-escalation on tariffs but left other key sticking points unresolved, including on key minerals known as rare earths.

Trump in Wednesday’s post also wrote that “full magnets any necessary rare earths, will be supplied, up front, by China” as a result of the London talks.

In a follow-up, he wrote, “President XI and I are going to work closely together to open up China to American Trade.”

Source:CNBC

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Adam

Economic

China–U.S. Trade War

The US and China ended two days of talks in London with the announcement of a new effort to try and move past recent flare-ups and get back to negotiations that had been planned after a gathering last month in Geneva.

Commerce Secretary Howard Lutnick described the agreement to reporters as "a framework to implement the Geneva consensus" — suggesting this gathering was about getting the "negativity out." The Chinese negotiator offered similar takeaways to Chinese state media.

The sides hinted that this week's talks will lead to a Chinese speed-up of shipments of rare earth metals critical to US and world supply chains in exchange for Washington easing some of its own export controls on things like semiconductors.

The clear focus for the moment is defusing these issues with an eye toward opening up talks on broader topics — like tariffs — later.

The deals will now be presented to US President Trump and Chinese President Xi Jinping for their reaction.

Trump offered his own reaction Wednesday morning with a social media post asserting that a deal is "done" and will include the supplying of rare earth minerals by China “up front” as well as give Chinese students access to US universities.

Trump also said, “WE ARE GETTING A TOTAL OF 55% TARIFFS.”

He arrived at that figure, according to a White House official, by adding together an array of preexisting duties and not any new tariffs. The president combined the existing 20% tariffs over illegal drugs and migration with 10% "Liberation Day" tariffs, with other sector-specific duties in place that average out to 25% but only apply to certain goods.

Outside analysts, such as the budget lab at Yale, have calculated that the effective tariff rate on China overall is more like 33%.

A variety of market observers quickly weighed in hours after Tuesday evening’s unveiling to suggest that the deal may not have a lot of meat on the bones, but at least relations are no longer moving in the wrong direction.

he talks perhaps underscored how unlikely a comprehensive trade deal is anytime soon, noted AGF Investments' Greg Valliere, "but at least relations may not worsen as talks continue throughout the summer."

Both sides promised additional talks in the weeks or months ahead, but none have yet been scheduled.

Veronique de Rugy, a professor at the Mercatus Center at George Mason University, suggested the talks continued to show China's leverage: "China is hurting, yes, but they still hold the upper hand on critical resources, and they know how to use them."

Any lessening of tensions and a freer flow of these mineral resources in China would be a significant boost to the global economy, with China holding outsized leverage in both the reserves and processing capacity of these key building blocks for everything from computers to electric vehicle batteries to medical devices.

Likewise, the US offering concessions on export controls would be a significant move after years where successive US administrations have wielded these controls — especially around the design and manufacture of semiconductors — by saying they need to be tight on China for national security reasons.

Any significant US move to relent on export controls would be "an unprecedented action," Wendy Cutler, a former senior US trade negotiator who is now at the Asia Society Policy Institute, wrote on LinkedIn.

The president did not address the export control issue in his Wednesday morning post.

But overall, Henrietta Treyz of Veda Partners described the rare earths and semiconductor talks as, perhaps for broader markets, "extraneous" to the larger issue of tariffs in the months ahead, noting "no tariffs have come off or are likely to come off in our view."

The May agreement in Geneva dropped American tariffs on Chinese goods from 145% to 30% and also slashed China's retaliatory duties from 125% to 10%.

But that pause is in effect for 90 days, leaving the US and China about two months to try and tackle those issues.

Before the talks concluded, Shehzad Qazi of the China Beige Book offered in a Yahoo Finance interview that any agreement would be a "shaky truce at best."

Terry Haines of Pangaea Policy summed things up for markets, calling this week's agreement "tiny." But Haines suggested any optimism could be short-lived, predicting an "ephemeral markets positive as its very limited scope and unfinished status sinks in."

Markets have "seen the patch-up movie many times," he added.

Source: finance.yahoo

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Adam

Economic

Some investors are questioning the amount of cash Big Tech is throwing at artificial intelligence, fueling concerns for profit margins and the risk that depreciation expenses will drag stocks down before companies can see investments pay off.

“On a cash flow basis they’ve all stagnated because they’re all collectively making massive bets on the future with all their capital,” said Jim Morrow, founder and chief executive officer at Callodine Capital Management. “We focus a lot on balance sheets and cash flows, and so for us they have lost their historical attractive cash flow dynamics. They’re just not there anymore.”

Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are projected to spend $311 billion on capital expenses in their current fiscal years and $337 billion in 2026, according to data compiled by Bloomberg. That includes a more than 60% increase during the first quarter from the same period a year ago. Free cash flow, meanwhile, tumbled 23% in the same period.

“There is a tsunami of depreciation coming,” said Morrow, who is steering clear of the stocks because he sees profits deteriorating without a corresponding jump in revenue.

Much of the money is going toward things like semiconductors, servers and networking equipment that are critical for artificial intelligence computing. However, this gear loses its value much faster than other depreciating assets like real estate.

Microsoft, Alphabet and Meta posted combined depreciation expenses of $15.6 billion in the first quarter, up from $11.4 billion a year ago. Add in Amazon, which has pumped more of its cash into capital spending in lieu of buybacks or dividends, and the number nearly doubles.

“People thought AI would be a monetization machine early on, but that hasn’t been the case,” said Rob Almeida, global investment strategist at MFS Investment Management. “There’s not as fast of AI uptake as people thought.”

AI Bounce

Of course, investors still have a hearty appetite for the technology giants given their dominant market positions, strong balance sheets and profit growth that, while slowing, is still beating the rest of the S&P 500. This explains the strong performance of AI stocks recently.

Since April 8, the day before President Donald Trump paused his global tariffs and turned a stock market swoon into a boom, the biggest AI exchange-traded fund, the Global X Artificial Intelligence & Technology ETF, is up 34%, while AI chipmaker Nvidia Corp. has soared 49%. Meta has gained 37%, and Microsoft has climbed 33% — all topping the S&P 500’s 21% advance and the tech-heavy Nasdaq 100 Index’s 29% bounce.

Just Tuesday, Bloomberg News reported that Meta leader Mark Zuckerberg is recruiting a secretive AI brain trust of researchers and engineers to help the company achieve “artificial general intelligence,” meaning creating a machine that can perform as well as humans at many tasks. It’s a monumental undertaking that will require a vast investment of capital. And in response Meta shares reversed Monday’s decline and rose 1.2%.

But with more and more depreciating assets being loaded on the balance sheet, the drag on the bottom line will put increased pressure on the companies to show bigger returns on the investments.

Dealing With Depreciation

This is why depreciation was a frequent theme in first-quarter earnings calls. Alphabet Chief Financial Officer Anat Ashkenazi warned that the expenses would rise throughout the year, and said management is trying to offset the non-cash costs by streamlining its businesses.

“We’re focusing on continuing to moderate the pace of compensation growth, looking at our real estate footprint, and again, the build-out and utilization of our technical infrastructure across the business,” she said on Alphabet’s April 24 earnings call.

Other companies are taking similar steps. Earlier this year, Meta Platforms extended the useful life period of certain servers and networking assets to five and a half years, from the four-to-five years it previously used. The change resulted in a roughly $695 million increase in net income, or 27 cents a share, in the first quarter, Meta said in a filing.

Microsoft did the same in 2022, increasing the useful lives of server and networking equipment to six years from four. When executives were asked on the company’s April 30 earnings call about whether increased efficiency might result in another extension, Chief Financial Officer Amy Hood said such changes hinge more on software than hardware.

“We like to have a long history before we make any of those changes,” she said. “We’re focused on getting every bit of useful life we can, of course, out of assets.”

Amazon, however, has taken the opposite approach. In February, the e-commerce and cloud computing company said the lifespan of similar equipment is growing shorter rather than longer and reduced useful life to five years from six.

To Callodine’s Morrow, the big risk is what happens if AI investments don’t lead to a dramatic growth in revenue and profitability. That kind of market shock occurred in 2022, when a contraction in profits and rising interest rates sent technology stocks plummeting and dragged the S&P 500 lower.

“If it works out it will be fine,” said Morrow. “If it doesn’t work out there’s a big earnings headwind coming.”

source : Bloomberg

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Adam

Economic

U.S. Treasury yields are set to decline further according to bond strategists who are clinging to expectations the Federal Reserve resumes cutting interest rates after pausing for more than half a year even as dealers are set to underwrite a deluge of new supply.

A slight majority now expect another sell-off in longer-dated bonds, the maturities most at risk, by the end of this month.

Concerns that President Donald Trump’s tax-cut and spending bill will add trillions of dollars to an already-staggering $36.2 trillion debt pile by 2034, along with tariff brinkmanship already have many holders of U.S. assets scrambling for the exit.

The rising "term premium" – what investors demand as compensation for holding longer-dated debt – leaves the market more vulnerable, particularly among foreign investors, ahead of upcoming Treasury bond auctions.

"The amount of debt we need to issue keeps rising and there doesn't appear to be anyone in Washington on either side that really has a plan to bring down deficits and address our fiscal situation," said Collin Martin, fixed income strategist, Schwab Center for Financial Research.

"That'll weigh on the long end of the curve where we need to see yields rise a bit to attract that marginal buyer."

Global sovereign bond yields have mostly risen in tandem over the past two months. A rapid sell-off in benchmark U.S. 10-year Treasuries in April pushed the yield up around 60 basis points.

That yield, which rises when prices fall, has since steadied, oscillating around 4.50%.

Median forecasts from nearly 50 bond strategists in a June 6-11 Reuters survey, most from dealers and sell-side firms, predicted the 10-year yield would decline a modest 13 bps to 4.35% in three months and to 4.29% in six from its current 4.48%.

Despite predicting a decline, more than half upgraded their forecasts from a May survey with many flagging the risk of yields moving higher.

"The 10-year will probably trade range-bound for a while between 4-4.50% and maybe even rise a little bit further, particularly given deficit concerns. The yield curve should continue to steepen as short-term yields drift gradually lower as the Fed cuts rates one or two more times by year-end," Schwab's Martin added.

The more interest rate-sensitive 2-year yield was forecast to decline a slightly steeper 17 bps to 3.85% in three months and to 3.73% by end-November, the survey showed.

Most economists polled by Reuters predict two or fewer rate cuts this year while rate futures are currently pricing two.

An ongoing auction for three-year Treasury notes has been met with somewhat tepid demand though markets will be paying closer attention to sales of longer-dated 10- and 30-year bonds this week.

"Given recent market behavior and the pressure we've seen on yields, it seems the long end of the yield curve is most susceptible to a supply-demand imbalance leading to higher rates," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management.

"There has been some disruption at the long end of the curve and the 30-year Treasury bond supply is the biggest question mark for the week in light of all the supply that is hitting. But that isn't to say threes and 10s are going to be necessarily easy either."

A Reuters survey of foreign exchange strategists conducted last week showed a near-90% majority expecting a decline in demand for dollar-denominated assets this year with Europe widely slated to be the biggest beneficiary.

"On the bond side European investors who are looking at the U.S. market would normally hedge currency risk, but that's become very expensive. So on a hedged basis, Treasuries are just not very attractive to European investors anymore," said Chris Iggo, CIO of AXA IM Core, AXA Investment Managers.

"There's been a lot of talk about defence spending and infrastructure but you know 'Show me the money!' - we haven't really seen the opportunity set increased massively just yet."

Source: reuters

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Damon

Economic

Finally some actual detail around what was actually agreed upon during yesterday's trade talks.

With questions swirling about the fate of Chinese rare earth exports to the US under the "framework", the WSJ reports that China is putting a six-month limit on rare-earth export licenses for U.S. automakers and manufacturers, giving Beijing leverage if trade tensions flare up again while adding to uncertainty for American industry.

Chinese negotiators agreed to the temporary restorations of the licenses after the latest round of intense talks with their American counterparts in London, aimed at upholding an interim agreement forged in Geneva last month.

In exchange, the U.S. negotiators agreed to relax some recent restrictions on the sale to China of products such as jet engines and related parts, as well as ethane, a component of natural gas important in manufacturing plastics.

According to people who consult with senior Chinese officials, Beijing wants to keep its chokehold on the supply of such critical commodities as leverage for future negotiations and when, not if, trade relations turns sour again.

During the London meetings, China agreed to approve rare-earth license applications for U.S. companies right away, pending the signoff of President Trump and Chinese leader Xi Jinping on the trade framework. The earliest an application could be approved is within a week of the two leaders officially signing off on the framework originally established in meetings last month in Geneva.

The WSJ source noted that as China approves the applications, the US will start to drop its countermeasures, including export controls on the jet engines and ethane.

In other words, the US now has six months to create its own rare earths supply chain or else Beijing will be able to use this trump card during the next negotations.

Trump said Wednesday that the deal with China to restore the trade cease-fire was done, subject to final approval from himself and the Chinese leader. “FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA,” Trump posted on his Truth Social platform, without giving additional details on the Chinese commitment.

China’s grip on rare-earth exports has become a key point of leverage for Beijing in trade negotiations with the U.S. In the wake of the trade truce in Geneva in mid-May that was expected to ease the flow, Washington accused Beijing of slow-walking export licenses. Beijing, in turn, blamed the Trump administration for undermining the Geneva agreement.

As part of the trade framework, the temporary rare-earths licenses Beijing is expected to start issuing immediately will mostly involve elements used in manufacturing electric vehicles, wind turbines, consumer electronics and military equipment.

Source: Zero Hedge

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Adam

Forex

Economic

Asia is progressively moving away from the U.S. dollar, as a mix of geopolitical uncertainties, monetary shifts and currency hedging prompt de-dollarization across the region.

Recently, the Association of Southeast Asian Nations, or ASEAN, committed to boosting the use of local currencies in trade and investment as part of its newly released Economic Community Strategic Plan for 2026 to 2030. The plan outlined efforts to reduce shocks associated with exchange rate fluctuations by promoting local currency settlements and strengthening regional payment connectivity.

“Trump’s erratic trade policy decisions and the dollar’s sharp depreciation are probably encouraging a more rapid shift towards other currencies,” said Francesco Pesole, FX strategist at ING.

Although the shift is more pronounced in Asia, the world has also been cutting its reliance on the greenback, with the share of the dollar in global foreign exchange reserves declining from over 70% in 2000 to 57.8% in 2024. More recently, the greenback also saw a steep selloff this year, particularly in April, following uncertainty around U.S. policymaking. Since the start of the year, the dollar index has weakened by over 8%.

While de-dollarization is not exactly a new phenomenon, the narrative has changed. Investors and officials are beginning to recognize that the dollar can and has been used as a leverage — if not overtly weaponized — in trade negotiations. This has led to a reevaluation of predominantly overweight U.S. dollar portfolios, said Mitul Kotecha, Barclays’ head of FX and EM macro strategy in Asia.

“Countries are looking at the fact that the dollar has been, and can be used as a sort of weapon on trade, direct sanctions, etc… That’s been the real change, I think, in the last several months,” he told CNBC.

De-dollarization is growing as Asian economies in particular seek to reduce reliance on the greenback in hopes of using their own currencies as a medium of exchange to reduce FX risks, said Lin Li, head of global markets research for Asia at MUFG.

Picking up pace

The move away from the dollar is gaining momentum in ASEAN, driven mainly by two forces: people and companies gradually converting their U.S. dollar savings back into local currencies, and large investors hedging foreign investments more actively, according to a recent note by Bank of America.

“De-dollarization in ASEAN is likely to pick up pace, primarily via conversion of FX deposits accumulated since 2022,” the bank’s Asia fixed income and FX strategist Abhay Gupta said.

Beyond ASEAN, the BRICS nations, which include India and China, have also actively developed and peddled their own payment system to bypass traditional systems like SWIFT and reduce dependency on the dollar. China has also been promoting bilateral trade settlements in the yuan.

De-dollarization is an “ongoing, slow process,” said Barclays’ Kotecha. ”[But] you can see it from central bank reserves, which have been gradually reducing the dollar share. You could see that from the share of the dollar in trade transactions,” he told CNBC. He added that Asian economies such as Singapore, South Korea, Taiwan, Hong Kong and China own a large share of foreign assets, giving them the greatest potential to repatriate their foreign earnings or assets back to their home currencies.

The sentiment is echoed by ITC Markets’ Asian FX and rates analyst Andy Ji, who noted that economies most reliant on trade will experience more significant declines in U.S. dollar demand, singling out the ASEAN+3 nations, which include China, Japan, South Korea, alongside the 10 ASEAN member states. As of last November, ASEAN+3 has over 80% of trade invoices in U.S. dollars.

De-dollarization is also occurring as Asian investors increasingly hedge their U.S. dollar exposures, according to Nomura. FX hedging is when an investor protects themselves from big swings in currency values by locking in exchange rates to avoid losses if the U.S. dollar weakens or strengthens unexpectedly.

When investors hedge their exposure to the dollar, they sell the greenback and buy local or alternative currencies, which increases demand for and appreciates the latter against the dollar.

“Some of the high performers that we’re looking at will be places like Japanese yen, Korean won and Taiwan dollar,” said Craig Chan, global head of FX strategy at Nomura Securities, who has observed a fair bulk of FX hedging coming from institutional investors like life insurance companies, pension funds and hedge funds.

The hedge ratio for Japanese life insurers is about 44%, according to Nomura. Based on the financial holding company’s estimates, that figure increased to around 48% in April and May. For Taiwan, Nomura estimates a hedge ratio of about 70%.

Dollar still king?

The shift away from the dollar also begs the question of whether this is a temporary phase or a structural shift.

For now, it may still just be cyclical, said Cedric Chehab, chief economist at BMI, who noted that it will only be structural if the U.S. employs sanctions more aggressively, making central banks wary of holding too many dollars. A second scenario would be if governments mandate their pension funds to invest a larger share of their assets domestically.

While some countries are reducing their exposure and reliance on the dollar, it remains challenging to dethrone the greenback’s position as the number one reserve currency, said industry watchers.

“No other currency holds the same liquidity, depth of bond and credit market as the dollar, so it’s more a matter of a reduction in its reserve appeal, rather than losing its throne,” said Pescole.

It’s also important to distinguish between U.S. dollar weakness from de-dollarization, said Peter Kinsella, global head of Forex strategy at Union Bancaire Privée.

“We’ve seen the U.S. dollar weaken before over various cycles and regimes – but it always maintained its reserve and hegemonic status,” said Kinsella, who added that the greenback’s use in trade and invoicing remains paramount in spite of the reduction in U.S. dollar exposure. As of April this year, more than half of global trade is still invoiced in dollar terms.

“That said, the wider decline in the USD’s use as a reserve asset appears set to continue, and I strongly expect that gold will be the main beneficiary from this,” said the strategist.

Source: cnbc

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Economic

Central Bank

A cooler-than-expected inflation reading from May is not likely to shake the view of most Federal Reserve policymakers that rates should stay on hold until there is more clarity about the impact from President Trump's tariffs.

Some economists were expecting to see higher costs from those tariffs showing up in the Consumer Price Index (CPI) report released Wednesday, but instead CPI showed that inflation pressures were relatively stable and even eased on a monthly basis.

The "core" measure of CPI, which excludes volatile food and energy costs, rose 2.8% over the past year in May, matching April. Monthly core prices increased 0.1%, a touch below April's 0.2% gain.

Economist Claudia Sahm, founder of Sahm Consulting, told Yahoo Finance that the May report doesn't "necessarily tell us where we are headed by the end of the year," and "I don't think we have a picture yet of what the costs are from the current" Trump administration trade policy.

But what this does, she added, is delay the Fed's ability to conclude that any tariff price increases are in fact temporary — a conclusion that would allow it to start cutting rates again.

This "may mean we delay the rate cuts."

Investors are not expecting an easing of monetary policy until September at the earliest. The Fed is widely expected to hold rates steady at its next meeting on June 17-18.

President Donald Trump on Wednesday reiterated his view that the Federal Reserve should cut interest rates by one percentage point, saying the latest inflation figures were "great."

"CPI just out. Great numbers! Fed should lower one full point. Would pay much less interest on debt coming due. So important!!!," Trump wrote on Truth Social in all capital letters.

But a Labor Department jobs report released last week makes it even less likely the Fed will consider rate cuts in the near term, Fed watchers said, since it doesn't show that the labor market is grinding to a halt.

The Fed has not altered its benchmark rates at all in 2025 after reducing them by a full percentage point at the end of 2024, citing uncertainties about Trump's policies.

In fact, in recent weeks, several Fed policymakers have made it clear they are more worried about inflation than employment and thus are content to be patient about any changes to the Fed's current stance.

"I see greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road, and this leads me to continue to support maintaining the FOMC's policy rate at its current setting if upside risks to inflation remain," Federal Reserve governor Adriana Kugler said last week in a speech at the Economic Club of New York.

Kansas City Fed president Jeff Schmid also said Thursday he is very focused on the risk for higher inflation from tariffs and that the Fed should "not let down our guard."

"While the tariffs are likely to push up prices, the extent of the increase is not certain, and likely will not be fully apparent for some time," Schmid added.

RSM chief economist Joe Brusuelas told Yahoo Finance on Wednesday after the CPI release that "we were not really seeing much of the pass through, if some at all, from the tariffs," noting a 0.3% decline in new vehicles and 0.5% drop in used cars and trucks.

"But don't get too comfortable," he added. "When [companies] hike prices by 10% to 15%, it gets passed through eventually."