Trump and Xi to discuss TikTok deal amid ongoing trade war

In focus over the weekend

US President Trump plans to speak with Chinese President Xi today, as the two sides appear to be making ground on a TikTok deal. A deal for the social media app might act as a catalyst for improving the relationship between the two largest economies amid an ongoing trade war.

The data side is fairly quiet, with UK retail sales as the main print we will be watching. 

Early Monday, China announces the Loan Prime Rates (LPR), which is widely expected to be unchanged. The LPRs are normally adjusted following changes to the 1-week reverse repo rate, which is the rate China uses to signal policy changes. This rate has not been changed since May, though. While there is pressure for more stimulus, broad based rate cuts may not be the preferred tool for China as they are also concerned about fuelling a liquidity driven equity bubble. We expect more targeted stimulus measures coming soon. 

Economic and market news

What happened overnight

In Japan, the Bank of Japan stayed on hold and kept interest rates unchanged at 0.50%. The decision was in line with expectations, and no outlook report followed as it was a 'small' meeting. With a solid growth picture and real wage growth back in positive territory, we think conditions are lining up for a rate hike at the October meeting, where the decision can also be supported by an updated growth and inflation outlook. A potential snap election in the wake of the LDP-leadership election 4 October could also end up postponing a potential rate hike to December.

Prior to the decision, August CPI data was released and matched expectations. CPI inflation excluding fresh food, Bank of Japan's favourite measure) was at 2.7% y/y, staying above the Bank of Japan's target. However, the measure is largely driven by food, as core inflation (CPI excluding food and energy) remained at a more modest 1.6%.

What happened yesterday

In the US, President Trump made another move targeting the Federal Reserve Governor Lisa Cook. An application was sent to the Supreme Court, asking for permission to fire the Fed Governor. The ongoing battle is jeopardizing the Fed's independence as Trump seeks to gain influence on key rate decisions.

In Norway, Norges Bank cut policy rates by 25bp to 4.00% in a unanimous decision. The guidance that accompanied the decision was on the cautious side and excludes the probability of rate cuts for the next three meetings (Nov, Dec and Jan). Due to this, we modify our Norges Bank call and no longer pencil in a December 2025 rate cut. Given our economic projections we now pencil in four 25bp rate cuts in 2026 (Mar, Jun, Sep and Dec), which would bring the policy rate to 3.0% by the end of 2026.

In the UK, the Bank of England (BoE) held the Bank Rate at 4.00% in a 7-2 vote split (7 for hold, 2 for cut). The BoE maintained their guidance of a "gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate". They slowed the pace of quantitative tightening to GBP 70bn annually from GBP 100bn - close to expectations. We think a November rate cut remains alive, although 22 October CPI data will be crucial. See more in our Bank of England Review - Near term rate cuts remain an option, 18 September.

In Germany, the Bundestag approved the government's delayed 2025 budget. The government has a majority so it was expected, but some members could have diverged from the party line, as seen previously when Merz was sworn in as Chancellor. The approval shows that the government is working together and pushing through the planned draft budgets, with the new 2026 budget also likely to be passed.

Equities: Equities rose yesterday as markets digested the Fed's dovish stance. Interestingly, gains occurred alongside rising yields - a notable shift from the pattern seen since summer, when lower yields had primarily fuelled US growth stocks. This dynamic aligns with the "run it hot" narrative we discussed yesterday. Small caps stood out, in particular with the Russell 2000 gaining 2.5% compared to 0.5% for the S&P 500 and 0.8% for the Stoxx 600. The rally in small caps finally pushed the index above its previous record close from 2021.

That said, this was far from a broad-based rally. Sector dispersion was significant, with strength concentrated in technology and industrials. Semiconductor stocks were especially strong, supported by news of Nvidia taking a stake in Intel and an upbeat earnings report and guidance from Renishaw. Futures are slightly higher this morning while tech-heavy Asian markets are taking a breather after the 10% rise (Shenzhen, Kospi) the last month.

FI and FX: Global yield curve bear steepened yesterday, with European government bonds leading the way whereas moves were more contained in US treasuries. The global FX market radiated a rather calm, post-FOMC vibe with light flows and mostly contained volatility. The USD continued to strengthen broadly, with EUR/USD breaking below 1.18. Norges Bank combined their rate cut with a hawkish adjustment of the forward-looking rate path, but although NOK-EUR spreads widened significantly we saw EUR/NOK edging higher, emphasizing the importance of the global investment environment when trading the NOK. The Norges Bank cut had seemingly no spillover to market pricing on the Riksbank next week, but we did see Swedish government bonds and the SEK both underperform peers. Overnight, Bank of Japan kept the key rate steady at 0.50% and USD/JPY is currently sitting at 147.50.