Markets cautious as US-China trade truce lacks substance

Fragile progress in US-China trade talks

Markets greeted news of a fresh US-China trade framework with cautious optimism, but underlying disappointment was evident. Negotiators from both sides agreed on a structure to implement a prior consensus reached in Geneva, but failed to set follow-up meetings or provide specifics. The absence of tangible commitments or timelines undercut hopes for a breakthrough.

At a time when investors are increasingly seeking clarity on global trade, the lack of details fueled risk aversion. Compounding concerns, a US federal appeals court ruled that President Trump can continue enforcing global tariffs while legal challenges proceed. This decision keeps trade uncertainty alive and highlights the looming July 9 deadline, when reciprocal levies on other partners may be enacted.

While the trade rhetoric showed a temporary thaw, the legal and political undercurrents suggest tensions could escalate again — particularly with rare earths and tech controls still unresolved.

Inflation pressures and Fed outlook dominate

The Federal Reserve’s policy path remains a key market focus as inflation data draws near. Consensus forecasts point to a 0.2% monthly rise in headline CPI for May and a 0.3% increase in core prices, with annual inflation potentially edging up to 2.5%. Any upward surprise could further delay the Fed’s plans to lower rates, especially with growth showing resilience.

Markets have already pared back expectations for Fed easing. Current pricing suggests only one rate cut is likely in 2025, down from earlier projections of two or more. Sticky inflation, solid labor markets, and firm consumption data are reinforcing the “higher for longer” narrative.

Adding to the intrigue, reports suggest Scott Bessent — a close Trump ally — is being floated as a possible replacement for Jerome Powell as Fed chair, a move that could significantly reshape the central bank’s policy stance.

Global trade and policy updates

• US-Mexico progress: Officials report steps toward easing steel tariffs, which would mark a modest improvement in bilateral trade relations.
  
• Japan update: The yen stabilized after the finance ministry dismissed plans for a July bond buyback, calming fears of further monetary loosening.
  
• UK infrastructure boost: Chancellor Rachel Reeves is expected to unveil an expansive fiscal plan worth hundreds of billions of pounds in public investment, aiming to stimulate industry and modernize infrastructure.
  

Market implications

The combination of tentative trade progress, persistent inflation pressures, and shifting central bank expectations continues to unsettle global markets. Investors are likely to remain cautious until more definitive signs emerge — both in trade diplomacy and monetary policy.

With geopolitical timelines colliding with macroeconomic inflection points, the coming weeks may prove pivotal in setting the tone for H2 2025. Market sentiment will remain sensitive to policy clues, inflation surprises, and whether political uncertainty deepens or begins to resolve.