The Morning Edge: Trump-Xi Call Eases Trade Tensions; Fed Signals Inflation Still in the Driver’s Seat

QUICK SNAPSHOT
Global Sentiment: Risk-off
Factors: FED Speaks, Trade Talks 

TODAY’S WATCHLIST
- RBI Interest Rate Decision
- US employment report for May 

THE BIG STORY
A pivotal call between President Donald Trump and Chinese leader Xi Jinping offered a moment of calm in escalating US-China trade tensions, even as concerns over inflation kept Federal Reserve officials on alert. In a rare direct conversation, the two leaders discussed ongoing disputes over trade and critical minerals, with both sides agreeing to resume lower-level talks. Trump hailed the call as a “very positive” step, despite Chinese warnings over Taiwan and rare earth policy.

Yet even as diplomacy flickered, economic pressures at home remained front and centre. Two key Fed policymakers warned Thursday that inflation remains the more urgent threat, outweighing labour market softness for now. With tariffs continuing to push prices higher, Fed Governor Adriana Kugler and Kansas City Fed President Jeff Schmid signalled support for holding interest rates steady, cautioning that the full inflationary impact of trade policy may only be beginning to show. The twin signal from Washington and Beijing, and from inside the Fed, underscore a volatile mix of geopolitics and policy now shaping the global economic outlook.

DATA
New unemployment claims in the US rose to a seven-month high last week, reinforcing concerns that the labour market is softening under the weight of persistent tariff-related uncertainty. The Labour Department reported that initial claims for state unemployment benefits increased by 8,000 to a seasonally adjusted 247,000 for the week ended May 31—the highest level since October. 

Meanwhile, a report from the Commerce Department's Bureau of Economic Analysis showed the trade deficit narrowed sharply in April. Imports dropped by the most on record as the earlier surge in shipments ahead of tariffs subsided, providing some potential lift to second-quarter growth. The overall trade deficit contracted by a record 55.5% to $61.6 billion, the smallest since September 2023. The goods trade gap also eased by a record 46.2% to $87.4 billion, the lowest since October 2023. The unwinding of pre-emptive imports that swelled the first-quarter deficit had contributed significantly to the 0.2% annualised contraction in GDP in Q1.

WHAT HAPPENED OVERNIGHT
US stocks ended lower on Thursday, weighed down by a sharp drop in Tesla shares despite signs of progress in tariff negotiations between President Donald Trump and Chinese President Xi Jinping. Tesla plunged over 14% as tensions between CEO Elon Musk and Trump escalated publicly, wiping out approximately $150 billion in market value. Losses extended beyond tech with Brown-Forman sank nearly 18% after the Jack Daniel’s maker forecast a decline in annual revenue and profit. Consumer goods giant Procter & Gamble also slipped 1.9% following its announcement to cut 7,000 jobs, around 6% of its global workforce as part of a restructuring effort.

US Treasury yields edged higher on Thursday as optimism around potential progress in trade negotiations helped offset concerns from recent soft economic data. The benchmark 10-year yield climbed 3.5 basis points to 4.40%, up from 4.365% the previous session. The 2-year note, sensitive to interest rate expectations, rose 5.6 basis points to 3.933%. Meanwhile, the 30-year bond yield was virtually unchanged at 4.8877%.

The US dollar slipped against the euro on Thursday after the European Central Bank signalled it may be nearing the end of its year-long policy easing cycle. Meanwhile, soft US economic data, particularly on the labour market, continued to weigh on sentiment amid ongoing tariff-related uncertainty. The ECB delivered its eighth rate cut in a year but struck a notably cautious tone on the economic outlook, citing subdued inflation and rising trade war risks. The euro rose 0.18% to $1.1437, while the dollar index was little changed, up just 0.01% at 98.80. Against the yen, however, the dollar gained 0.68% to 143.73.

Brent crude oil prices climbed on Thursday as a phone call between US President Donald Trump and Chinese President Xi Jinping lifted hopes for trade progress, allowing investors to shrug off bearish signals from rising U.S. inventories and Saudi Arabia’s price cuts for Asian buyers. US West Texas Intermediate crude rose 0.83% to settle at $63.37 per barrel, while Brent crude gained 0.74% to close at $65.34 per barrel.

Day’s Ledger

Economic Data:

• UK May Halifax house price index
• Eurozone Jan-Mar GDP data
• US May non-farm payroll data
• US employment report for May

Corporate Actions:

• Jan-Mar earnings:  KCK Industries, Marinetrans India, Sterling Green Woods
• Ethos to consider right issue 
• Indian Infotech to consider right issue
• Koura Fine to consider fund raising 
• SBFC Finance to consider debentures issue

Policy Events

• RBI Interest Rate Decision
• ECB President Lagarde speaks 

TICKERS

• COAL INDIA signs pact with IPRRCL to boost rail infrastructure
• IREDA opens QIP at ₹173.83/share; may offer up to 5% discount
• JSW ENERGY adds 281 MW green power, signs PPA with Adani Electricity
• POWER GRID commissions new interstate transmission network in Gujarat
• PRAJ INDUSTRIES bags biorefinery project in Paraguay from Enersur
• Ramakrishnan Chander appointed CIO at LIC
• SHYAM METALICS stainless steel sales jump 41% on year in May
• SKF INDIA gets NCLT nod to seek shareholder approval for industrial biz demerger
• TEJAS NETWORKS gets ₹1.23 billion under PLI scheme

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