China's foreign ministry confirms China and the US are NOT engaged in trade talks. Another poor Fed regional survey; plenty of media commentary on reduced China-US trade and prospect of empty US shelves ahead

The new week has begun with US equities reversing some of last week’s strong recovery, US Treasury yields falling modestly with a steepening bias and the USD on the back foot, with negative headlines on tariffs and the prospects for the US economy.

After last week’s strong rally, US equities have begun the week on a soft note, with the S&P500 index showing modest falls, driven by the tech sector. Other equity markets were stronger, with the Euro Stoxx 600 index up 0.5%, the UK FTSE100 flat and the Nikkei index up 0.4%.

While newsflow has been light, tariffs and the state of the US economy are forefront of mind. Over the weekend, President Trump claimed that he had spoken with President Xi (albeit he didn’t give any indication of timing) and the US was talking with China on trade and tariffs but last night this was denied by China. China’s foreign ministry said that there have not been any calls with the US recently and “let me be make it clear one more time – China and the US are not engaged in any consultation or negotiation on tariffs”.

When asked about this on CNBC, US Treasury Bessent said “all aspects” of the US government are in contact with China and “I believe it’s up to China to de-escalate because they sell five times more to us than we sell to them, so these 125% tariffs are unsustainable”.  He added that he has “an escalation ladder in my back pocket” and this would take the form of an embargo.

At a press conference yesterday, Chinese policymakers reiterated their plan to support the economy in the face of US tariffs and authorities are “fully confident” in reaching the GDP target of 5% for 2025. One official said that they didn’t need US agricultural or energy imports.  They were “highly substitutable” and could be sourced elsewhere. The briefing followed the readout at the end of last week following the latest Politburo meeting which offered up a menu of various support measures.  The message reinforced the consensus view that policy will step-up when most needed later in the year.

Getting plenty of airplay in the media is data showing a slump in goods being transported from China towards the US, with various indicators showing freight activity and bookings down in the order of 30-50% compared to year-ago levels. While we might have passed peak market anxiety regarding the trade war, the economic impact is only just beginning.

We don’t normally report on all the regional Fed surveys, but for the record (and since there were no key releases to report on) the Dallas Fed manufacturing activity index for April slumped 19.5pts to minus 35.8, its lowest reading in five years.  The slump in activity is consistent with other regional Fed surveys released to date, ahead of the US ISM manufacturing survey later this week. Weaker activity and higher pricing indicators have been the norm.

US Treasury yields are lower, led by the short end as traders build in more chance of Fed rate cuts later this year, given the looming risk of recession. The meeting with the largest change in rates priced is September, when the proverbial hits the fan from an economic perspective, as by then the labour market will likely be showing some pain on the current policy trajectory.  The 2-year rate is currently down 5bps from last week’s close to 3.69%, while the 10-year rate is down 1bp to 4.22%.

The USD is broadly weaker, although the NZD has underperformed, after last week’s outperformance, and is flat around 0.5960. With the AUD rising back up through 0.64, NZD/AUD has nudged down to below 0.93. Safe havens CHF and JPY have outperformed, and NZD/JPY is down 1% to 84.8.  NZD/GBP is back below 0.4450 and NZD/EUR has fallen modestly to 0.5230.

Domestic rates played catch-up to lower US rates following the long weekend, resulting in NZGB yields down 5-8bps across the curve, led by the long-end.  The 10-year rate closed down 7bps to 4.45%. Swap rates fell 4-6bps.

In the day ahead, NZ Finance Minister Willis will be giving a pre-Budget speech this morning. There are only second-tier economic releases, the ones of most interest being the US JOLTS report on the labour market and the US Conference Board measure of consumer confidence.