April 25 – Stock futures pulled back modestly overnight on trade uncertainty, although there are glimmers of hope. The VIX is trading below 27 this morning, while the dollar index firmed to trade near 99.7. Yields on 10-year Treasuries are trading near 4.27%, while yields on 2-year Treasuries are trading near 3.79%. Crude oil prices are modestly weaker, while the grain and oilseed sector traded modestly higher overnight.
Are there signs of de-escalation in the China trade war? Perhaps so, but these are very early signs that still leave us a long way from an agreement. It started with talk out of the White House of possibly cutting tariffs in half, although that was later refuted by President Trump. Members of Trump’s cabinet spoke of the need to de-escalate, saying that current tensions were unsustainable. President Trump told reporters that conversations are happening with China, and that they’re good, while China denied that any formal negotiations are taking place. I believe that both statements are true. China considers formal negotiations to be face-to-face negotiations, but there probably are informal conversations taking place at various levels.
Today we learn that China is considering exempting certain necessary items from its 125% retaliatory tariffs. The initial focus appears to be on exempting imported medical equipment, ethane and plane leasing. Furthermore, a task force operating for China’s Ministry of Commerce is said to be requesting input from the industry of additional items that need to be exempted. We saw this pattern in Trump 1.0, with China even exempting U.S. soybeans when it actually needed to buy them. This suggests that China may be willing to soften its position to support its own economy, and to prevent rising costs at a time when consumer sentiment remains near record low levels.
Is the tariff war hurting China more than the United States? China doesn’t believe so. It believes that its citizens are better prepared to stand up to the “bullying” being done by America, with deeper savings and willingness to sacrifice. Whether that is true or not is subject to debate. But what matter is, that’s what China’s leaders believe, and right now there is a strong sense of nationalism in China to back that up. As such, I don’t expect China to roll over until / unless greater pain is felt. The willingness to consider exemptions, as stated above, suggests that there is some pain though. China’s stock market remains propped up by inflows of money from state-backed institutions, but trade and manufacturing is being impacted. Layoffs have started, as I stated yesterday.
Goldman Sachs surveyed 46 enterprises whose products comprise 70% of China’s export value to the United States. That survey revealed that the tariffs severely impacted 41% of the products, with 36% negatively impacted and 23% slimly impacted. The survey revealed that 60% of Chinese producers are negotiating prices with U.S. buyers to consider passing or sharing the tariff burden. U.S. importers are also placing orders from alternative sources, mainly in Southeast Asia, Mexico and India to fill the gap. The survey suggests that they should be able to maintain a stable supply for most products, although there may be some shortages and empty shelves in the U.S. Most major suppliers keep a two to six-month supply as a buffer, but some smaller independent supplier may encounter shortages that keep them from keeping their shelves stocked. Chinese shipping data suggests that demand for containers moving from China to the United States rose by 10% year-on-year in the first quarter of this year as suppliers stocked up, but they’re expected to fall by 15% in the second quarter and fall by 27% on the year in the third quarter if this trade war continues.
In the end, it comes down to who loses the most political capital first – Xi Jinping or Donald Trump. Neither face an upcoming election. Xi is president as long as he wants and Trump is in his final term in office, although he can only lead so far as Congress allows him to do so. As such, Xi has to worry about losing the trust of his people and Trump must maintain the support of his party. For his part, Trump needs to start producing hard evidence that his strategy is working – namely trade deals with major trading partners. Xi needs to keep his economy from collapsing. The current standoff is unsustainable. Both need a “way out” that allows them to look strong before their constituency. It appears that they are slowly finding that “way out” via the informal talks that are going on behind the scenes. That won’t produce a trade deal, but it may ease the tensions enough to allow those formal talks to start.
The soybean complex continues to be supported by the soyoil market, as investors anticipate a possible announcement from the U.S. Environmental Protection Agency today on the biomass diesel production mandate. That pushed soyoil prices to their highest level since December 2023, with soybeans at two-month highs. Additional support for the grain and oilseed complex comes from the above signs of thawing in the China / U.S. trade war, although gains are limited by the ongoing uncertainties ahead of the weekend, along with a more favorable weather outlook in key growing areas for many of these products. Headlines will continue to drive sentiment.
