Five fundamentals for the week: Trump-Xi summit and Fed may spook markets

Small deal or a big deal? Leaders of the world’s two largest economies meet for the first time in six years and the stakes for global trade and the economy are high. 

1 Xi meets Trump for a trade summit

Almost there – that has been the message from preliminary talks between high-ranking US and Chinese officials working on a trade deal in Malaysia. The final words await US President Donald Trump and his Chinese counterpart Xi Jinping, who are set to meet in South Korea on Thursday.

The main point of contention between the world’s largest economies is Beijing’s curbs on rare earth exports. China controls about 70% of the world’s exports of these critical minerals, and could stall electric vehicle production among other industries. 

Trump would also like China to increase the buying of US soybeans, supporting a key constituency. Xi aspires to get his hands on advanced microchips and to lower American tariffs, especially the extra 20% Washington slaps as a punishment for fentanyl flowing into America from China.

The latest reports suggest both sides have reached agreements on many topics, but details are vague. 

The wider and longer-lasting the deal is, the better for the global economy and Stocks. In case of a short-lived deal or an unlikely last-minute cancellation of the summit, the safe-haven US Dollar (USD) and Gold would shine. 

2 US government shutdown is about to complete a month

When will the US government reopen? The closure has been in effect since October 1, and is already the second-largest in history. Federal workers – those deemed essential and those at home – are going without paychecks, and some services are frozen. For markets, the fact that most economic figures are not released and that perhaps insufficient data is collected, is a pain.

Will Congress find a deal, at least a temporary one? The faster a deal is reached and the longer the reopening, the better for Stocks. If there is no agreement or merely a short-term stopgap reopening, the US Dollar and Gold would benefit from fear of another long shutdown.

And at the moment, the government remains shut, a slow drag in the background. 

3 Fed may stress uncertainty as it cuts interest rates

Wednesday, decision at 18:00 GMT, press conference at 18:30 GMT. The Federal Reserve (Fed) is set to cut interest rates by 25 basis points (bps), repeating last month’s move. The Consumer Price Index (CPI) report released on Friday showed inflation was somewhat softer in September, all but cementing the move.

How many members support a larger, 50-bps cut? Governor Stephen Miran, the recent President Trump appointee, is widely expected to back a larger move. If he is joined by fellow governors Christopher Waller and/or Michelle Bowman, Stocks and Gold would leap while the US Dollar would fall. In the unlikely case that there is a unanimous vote – which means Miran aligns with the majority – the opposite reaction would be seen.

Apart from watching dissenters, investors will await the message from Fed Chair Jerome Powell, who may refuse to commit to any outcome. Uncertainty about the effects of tariffs, and especially the lack of updated information about the labor market, hobbles the bank’s decision-making process. 

Powell recently stressed weaker job gains, partially as a result of curbs on migration, but without updated figures, it is hard to make decisions. Analysts will try to understand his overall tone. If they conclude Powell is worried about the economy and about to slash borrowing costs quickly, Stocks and Gold would benefit. If he seems content with the state of the economy and reluctant to cut interest rates, the Greenback has room to rise. 

4 BoJ set to resist political pressure and convey hawkish message

Thursday, during the Asian session. The Bank of Japan (BoJ) has been raising interest rates while other central banks have gone in the other direction. However, while officials in Tokyo discuss further hikes, the last move was back in January.

Sanae Takaichi, Japan’s newly minted Prime Minister, prefers a dovish monetary policy and has mused about asserting more control over the central bank. Will Governor Kazuo Ueda and his colleagues cave under pressure and abandon plans to raise rates? Not so fast.

I expect the BoJ to leave borrowing costs unchanged at this juncture, but continue signaling the next move is up. Moreover, some members may dissent and opt for a rate hike already now. If two, or especially three, BoJ members vote to move now, the Japanese Yen (JPY) would strengthen. 

It is essential to note that the recent weakness of the Yen is pushing inflation higher via higher import costs, and the BoJ would like to keep prices under control.

5 ECB could try to pump up expectations

Thursday, decision at 13:15 GMT, press conference at 13:45 GMT. The European Central Bank (ECB) last changed interest rates in June and has since conveyed a message of stability. At its penultimate gathering of 2025, the Frankfurt-based institution is set to keep borrowing costs unchanged again.

ECB President Christine Lagarde will likely talk up the Eurozone’s economies, leaning on relatively upbeat Purchasing Managers’ Indexes (PMIs) and signs that increased government spending has boosted growth. 

And while France, Lagarde’s home country, is still undergoing political turbulence, Bond markets are calmer in the Eurozone’s second-largest economy. That, and the fact that the ECB does not publish new forecasts, will make her job easier

All in all, a confident message by the ECB will likely push the Euro (EUR) slightly higher, yet massive moves are unlikely. 

Final thoughts

Uncertainty about the scope of a Sino-American deal and the ongoing shutdown raises uncertainty and could trigger surprising market moves. Trade with care, including on Friday, Halloween.