US-China Trade Tensions Flare
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Economics Research17 Oct 2025
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US/Japan/Eurozone: US-China trade conflict reignites; Powell’s dovish stance Trump’s decision to impose additional 100% tariffs on China followed the latter’s unveiling of a series of export controls on rare earths and other critical minerals. As before, both Washington and Beijing are weaponising their structural advantages. Trump is flexing the US’ leverage as the world’s largest buyer with 100% tariffs, while China leverages its control over supply chains, particularly rare earths and critical minerals. Managed brinksmanship has become a strategy: Washington seeks coercion, while Beijing aims to compel engagement and negotiate from a position of strength too, leaving room for rollbacks to avoid a full-blown trade war. This negotiating tactic may keep the door open for a possible Trump-Xi meeting at the APEC Summit – a political win for Trump and another milestone for Xi’s “Strategic Endurance” priority in the upcoming 15th Five-Year Plan (2026-2030).

Speaking at the NABE Annual Meeting, Fed Chair Jerome Powell said he would look pass the recent rise in inflation and keep reducing interest rates. He noted that the downside risks to the labour market have increased, not helped by the data lapses from the US government shutdown. Against this background, Powell observed that liquidity conditions were gradually tightening, which may warrant the Fed to halt balance sheet shrinking in the months ahead. Powell’s comments have relegated the significance of the US CPI data release on 24 Oct. The futures market has fully priced 25 bps cuts at the final two FOMC meetings this year and reinstated three additional cuts in 2026.

Shifting to Japan, following Komeito’s departure from the Liberal Democratic Party (LDP)-led coalition, the National Diet’s vote for Prime Minister was postponed from 15 to 21 Oct. Although Takaichi secured victory in the LDP leadership race, Komeito’s withdrawal from the coalition has left the LDP heading a minority government. Her odds of winning the National Diet vote will reduce dramatically if the opposition unites behind a challenger from the Democratic Party for People. While the OIS market is not pricing in a rate hike by the Bank of Japan (BOJ) at the 30 Oct meeting, it has increased the odds of a hike at the 29 Dec meeting due to Takaichi’s weakened leadership credentials.

In France, reappointed Prime Minister Sebastien Lecornu submitted Budget 2026 on 14 Oct, meeting the deadline to initiate a 70-day debate in the National Assembly. To ensure the bill’s passage by the end of 2025, Lecornu has secured support from the Socialist Party, which will hopefully help his government survive another no-confidence vote from the far-right and radical-left parties later in the week. To ensure the continued support of the Socialists, Lecornu has proposed to suspend President Emmanuel Macron’s 2023 pension reform plan from this autumn until Jan 2028 or after the 2027 presidential election.

Figure 1: Market is not pricing in a BOJ October rate hike, but is instead increasing odds for a December rate hike

Source: Bloomberg, DBS




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