30 Oct 2025
This report provides an update on recent market conditions, focusing on the significant trade agreements involving the United States, Japan, and South Korea, alongside ongoing US-China negotiations. It also delves into the anticipated Federal Reserve meeting and the complexities surrounding its monetary policy decisions.
Recent trade attacks from the US have compelled Japan and South Korea, historically holding large trade surpluses with America, to commit to substantial investments in the US to secure tariff exemptions. These commitments have paved the way for new trade agreements expected in July, though negotiations on investment size, timing, and structure have been prolonged.
Japan has pledged to invest up to $550 billion in the US, primarily through government-affiliated funds and institutions. An early September MoU grants the US the right to re-impose tariffs if Tokyo fails to deliver on projects approved by Trump within 45 days, with investments required by January 19, 2029. Profits from these projects are split 90% for the US and 10% for Japan.
South Korea has similarly promised a $350 billion investment, but details remain unfinalized, with disputes over the investment amount, duration, and profit-sharing model. Concerns persist regarding the potential negative impact on Korea's economy and currency market if these commitments lack US government financial support.
While Trump frames these agreements as 'cash up front,' officials from both countries clarify that the bulk of commitments are in the form of loans and loan guarantees rather than direct equity purchases or assets. These investments aim to reduce tariffs from 25% to 15% and formalize new trade agreements, although 25% tariffs on automobiles and parts remain subject to Trump's executive order.
Japan's investment commitment represents approximately 14% of its GDP by 2024 and nearly half of its foreign exchange reserves, while Korea's commitment is around 20% of its GDP and 80% of its foreign exchange reserves, placing significant financial strain on both. The US trade deficit was $68 billion with Japan and $66 billion with Korea last year, making these commitments significant relative to the trade imbalances.
A large influx of Japanese capital into the US could weaken the Yen, though Japan's trade minister indicates financing through a special government foreign currency account using existing dollars to minimize market impact. Both countries are concerned that shifting traditional production to the US could weaken domestic industries, with Korea's central bank limiting annual investment to $20 billion to avoid currency market disruption, a figure lower than US demands.
Trump and Xi Jinping are scheduled for a three-hour meeting to discuss various issues, including a potential reduction of fentanyl-related tariffs on Chinese goods and China's access to Nvidia's Blackwell AI chips. Trump anticipates Beijing will take steps to combat fentanyl precursor exports, potentially leading to a 20% reduction in US tariffs on Chinese goods to about 10%.
A potential agreement to grant China access to Nvidia's Blackwell AI chips would be a major concession, likely facing opposition in Washington due to national security implications. Despite Trump's claims of sales approval, Nvidia's CEO stated China has blocked product shipments, and the company's market share in China has fallen to zero, even after the US eased export controls on simpler chips.
China is keen to reduce export tariffs, and a reduction in fentanyl-related tariffs, assuming other proposed tariffs are not enforced, could lower average tariffs on Chinese goods to around 45%. Beijing is reportedly considering a one-year delay on export restrictions for rare earth elements, while Trump has threatened 100% additional tariffs on Chinese goods if no agreement is reached by November 1. China's recent purchases of US soybeans indicate efforts to de-escalate tensions.
The market anticipates a 25 basis point rate cut, with no surprise expected as this outcome is largely priced in. Given the lack of recent economic data and divergence among policymakers, Fed Chair Powell is likely to provide limited forward guidance, particularly concerning the December meeting.
Powell has previously focused on labor market tightening, and recent CPI data, lower than expected, might temporarily alleviate pressure from anti-inflationary policymakers. However, persistent price increases in the services sector continue to pressure inflation, complicating the Fed's path toward a neutral policy stance.
Investors exhibit excessive confidence in aggressive easing policies, driven by recent cooling labor market data and lower-than-expected inflation reports. This optimism persists despite inflation remaining stubbornly above the 2% target and the economy's opacity due to a lack of current data. The market forecasts over a 90% probability of another 25 basis point cut in December, overlooking the Fed's challenges like frequent changes in fiscal policy and insufficient data.
If interest rates fall to a level that is no longer restrictive, it could exacerbate inflation and hinder the Fed's ability to control price stability, a critical concern often overlooked by the market.
The discussion on reducing the Fed's balance sheet, or quantitative tightening (QT), is a key focus for the current meeting. Powell previously indicated that QT might conclude in the coming months, aiming to shrink the portfolio without draining liquidity from short-term financial markets, with implementation potentially starting from September or January.
Another potential topic for discussion is the easing of banking regulations. Such a measure could incentivize banks to hold more securities on their balance sheets, influencing market dynamics.
Inflation is stubbornly higher than the 2% target, and the economic conditions are unclear and vague due to the lack of published data, which is concerning.
| Category | Description | Japan Commitment | Korea Commitment | Benefit | Profit Split | Tariff Outlook | Nvidia Chips | China's Concessions | Expected Rate Cut | December Outlook | Key Challenges | Data Scarcity Impact |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| US-Japan/Korea Trade | New trade agreements spurred by US pressure for investments. | $550 billion by Jan 2029 (14% of GDP, 50% FX reserves) | $350 billion (20% of GDP, 80% FX reserves), details disputed | Reduced tariffs (25% to 15%) for both, except auto sector | 90% US, 10% Japan (Korea's disputed) | |||||||
| US-China Trade Talks | Trump-Xi Jinping meeting to reduce tensions. | Potential 20% reduction on Chinese goods (to ~10%); Trump threatens 100% additional tariffs if no deal | Possible Chinese access to Blackwell AI chips (major US concession, national security concerns) | Might delay rare earth export limits for one year, initiated US soybean purchases | ||||||||
| Federal Reserve Meeting | Anticipated interest rate decision and future guidance. | 25 basis points (market fully priced in) | Over 90% market probability for another 25 bps cut, despite Fed's caution due to data scarcity | Inflation above 2% target, opaque economic data, policymaker divergence, balance sheet reduction (QT) | Lack of October CPI data limits Powell's forward guidance |
