Investors pull back on US tariff threat against China and continuing government shutdown

Our weekly podcast by Kevin Lings

Markets soften on US government shutdown, escalating trade war with China

In this podcast, STANLIB’s Chief Economist, Kevin Lings, considers the likely implications if the US government shutdown continues for an extended period. He also touches on export restrictions announced by China on certain rare earth minerals and the US response to threaten higher tariffs on China, which suggest the trade war could escalate.

The focus areas during the week included

The US equity market weakened appreciably on Friday after President Donald Trump posted on social media that he was considering “a massive increase of tariffs on Chinese products” in response to China’s proposed new export controls on rare earth minerals. The S&P 500 index declined by 2.4% in the week, losing 2.7% of its value on Friday. (Ongoing concerns about the impact of the US government shutdown added to the negative sentiment.)

While the European Stoxx 600 also had a negative week, losing 1.1% of its value, the SA All-Share Index gained a modest 0.2%. However, it lost 0.9% in the second half of the week after reaching another record high on Wednesday. Japan’s stock markets rose sharply over the week, with the Nikkei 225 Index rising by a very impressive 5.1% and the broader TOPIX Index up 2.2%. Investors in Japan reacted positively to Sanae Takaichi winning the Liberal Democratic Party’s (LDP) presidential election – although this was before the Komeito Party withdraw from the coalition with the LDP Party on Friday afternoon after markets were closed (see discussion below).

US government bonds generated positive returns as yields decreased sharply on Friday in response to a potential re-escalation of the US/China tariff war. The yield on the US 10-year government bond ended the week at 4.05%, down from 4.18% at the end of the trading day on Monday, 6 October.

The US dollar gained 1.4% against the euro, helped by political uncertainty in France and the election of a new Japanese leader whose policies are likely to weaken the yen. This triggered a slight weakening of the rand and emerging market currencies, which lost 0.7% and 0.5% respectively against the dollar. Despite this, the performance of the rand and emerging market currency index remains impressive, up 8.2% and 7.6%, respectively year-to-date. The recovery in the dollar is expected to be modest, given investor concerns about tariff policy, the impact of the US government shutdown and Federal Reserve (Fed) independence.

The US government shutdown has been in effect for 12 days and is becoming increasingly problematic. The US Senate has voted on seven separate occasions (the most recent vote was on Thursday) to try to (at least) pause the shutdown, but none of those efforts got close to achieving the 60 votes needed to take the process forward. The Senate will only reconvene again on Tuesday. The immediate concern is salary payments for the US military, which are scheduled for 15 October. The media is reporting that President Trump has instructed US Defense Secretary Pete Hegseth to use “all available funds” to pay members of the military on 15 October, but the source of those funds is unclear. Unfortunately, some Federal employees began receiving notices on Friday telling them they will be “laid off in 60 days”. Evidently more than 4 000 workers at seven federal agencies could get “lay-off notices”, but the details of the possible “layoffs” are vague. Lastly, several US airports have already experienced flight delays due to shortages of air traffic controllers, who are considered essential workers.

The US Bureau of Labor Statistics (BLS) announced that CPI data for September 2025, which was initially scheduled for release on 15 October, will now be released on 24 October, despite the government shutdown. The BLS has asked a small group of workers to return to work to ensure that the CPI data is released prior to the next Fed interest rate meeting scheduled for 28/29 October 2025. At this stage the market is pricing a 98% chance of the Fed cutting interest rates by a 25 bps on 29 October.

The Trump administration has made some progress towards announcing who will replace Jerome Powell as the next chairman of the Fed when Powell’s term ends in May 2026. According to Treasury Secretary Scott Bessent, interviews were conducted with 11 potential candidates, which has allowed the list to be reduced to five people: the Vice Chair for Supervision at the Federal Reserve, Michelle Bowman; Fed Governor Christopher Waller; Kevin Hasset, Director of the National Economic Council; former Fed Governor Kevin Warsh; and BlackRock Fixed Income CIO Rick Rieder. More interviews will be conducted will the five candidates before a recommendation is sent to President Trump for a final decision. While Chris Waller is probably the best candidate for the position, many economists expect Trump will pick Kevin Hasset.

The minutes of the Fed’s 17 September policy meeting showed some divergent opinions among policymakers as they weighed conflicting economic signals. They expressed ongoing concerns about persistently high inflation and a weakening labour market, noting “that upside risks to inflation remained elevated and that downside risks to employment were elevated and had increased”. Ultimately, most policymakers “judged that it likely would be appropriate to ease policy further over the remainder of the year”, although some believed that current “monetary policy may not be particularly restrictive, which they judged as warranting a cautious approach in the consideration of future policy changes”. Recent comments from Federal Open Market Committee (FOMC) members highlight some of the divisions in the committee. Minneapolis Fed President Kashkari warned that any drastic interest cuts could risk stoking inflation, while new Fed board member Stephen Miran continues to push for multiple interest rate cuts.

The University of Michigan reported that the Consumer Confidence Index for October was relatively unchanged from the prior month at 55 from 55.1 in September. The reading was below market expectations for an increase to 55.8 and the lowest level of consumer confidence in five months. According to the report, consumers’ views of current personal finances and year-ahead business conditions improved, while expectations for future personal finances and buying conditions for durable goods declined. Expectations for inflation in the year ahead edged down to 4.6% from 4.7% in September, while long-run inflation expectations remained steady at 3.7%.

The IMF/World Annual Meetings take place in Washington DC next week (13 to 18 October). At the same time, the Institute of International Finance will host its annual meetings, also in Washington. Once again, the seminars and other meetings scheduled for the week are impressive and will involve hundreds of speakers from around the world. We have attended the events on numerous previous occasions and they are extremely worthwhile. You get to listen to and engage on numerous key economic and financial topics, while the networking opportunities are extensive. Hopefully, we can read some of the speeches/lectures online within a few days after the event.

SA’s manufacturing production increased by 0.4% m/m in August 2025, after declining by 0.8% m/m in July. Despite the monthly increase, production has declined by 1.5% over the past year and remains 2.5% below the level of output achieved prior to the start of Covid in 2020. More encouragingly, over the past three months manufacturing output has risen by 1.5% q/q. Most of the main manufacturing sectors made a positive contribution, with the key exception of dairy products, printing, refined fuel, cement, and iron and steel. Ultimately, a competitive and successful manufacturing sector requires a combination of factors, including supportive infrastructure (such as electricity and rail/port capacity), appropriate regulation, a stable and productive workforce, innovative and dynamic management, an appropriate balance between the use of technology and labour intensity, access to finance, and continued growth in final demand. Unfortunately, many of these factors remain underwhelming in SA.

Preliminary data suggested that consumption during China’s Golden Week lagged the growth in activity recorded during the five-day Labour Day holiday in May 2025. Sales at select retailers and restaurants rose 3.3% in the first half of Golden Week, nearly half the pace recorded over the Labour Day break. While average passenger traffic for all travellers increased by 6.2%y/y, (according to an estimate from China’s Ministry of Transport), this was lower than the 8% increase over the Labour Day holiday. The underwhelming consumption data for Golden Week, typically a peak consumption period in China, undermines the government’s efforts to rebalance the economy to favour domestic spending and services and pivot away from industry and exports. China’s fourth plenum, a high-level political meeting of Communist Party officials, is scheduled for 20-23 October. In the meeting, officials are expected to deliberate and approve a proposal from top leaders on China’s next five-year plan laying out the country’s economic and social development goals. Analysts pay close attention to any public statements made after the meeting for clues about any changes in China’s economic strategy.

On Friday, the Komeito Party in Japan, the longstanding coalition partner of the LDP, said it was withdrawing from the coalition. The party cited policy differences and expressed concerns about how a past political funding scandal was handled. The development raised some concern among investors about the likelihood of Sanae Takaichi becoming the next prime minister and prompted speculation about the prospect of a snap election being called.

Japan’s wage growth slowed in August to 1.5% year on year (nominal), well below the consensus expectations for growth of 2.7%, and down from a revised growth rate of 3.4% in July. Real (inflation-adjusted) wages declined for the eighth successive month.