News of the week summary - 02/11/2025

US and China strike trade truce 

The United States and China have agreed to a one-year trade détente aimed at easing escalating tensions over technology, critical minerals, and tariffs. The deal pauses several contentious measures that had threatened to reignite the trade war between the world’s two largest economies.

At the heart of the agreement is a mutual decision to suspend new export controls on rare earth elements and semiconductors, two sectors central to both countries’ strategic interests. Rare earths are essential materials used in everything from smartphones to electric vehicles and military technology, and China dominates their global supply. The U.S. had planned to extend its technology export restrictions to Chinese subsidiaries, a move that Beijing saw as a direct threat to its manufacturing and tech industries. By agreeing to postpone these measures, both sides have created breathing room for negotiations that could lead to a more comprehensive deal later this year.

The accord also includes tariff relief. The U.S. halved its 20 percent tariff on Chinese goods linked to fentanyl production, a gesture of goodwill in exchange for China’s renewed commitment to curb exports of chemical precursors used in the deadly opioid. This cut lowers the average U.S. tariff on Chinese imports to about 45 percent. While modest, the move signals a desire for de-escalation after years of tit-for-tat trade restrictions that strained supply chains and weighed on global growth.

Discussions also covered semiconductors, though the most advanced chips, used in artificial intelligence and defense applications, remain excluded from potential trade. U.S. chipmaker Nvidia is expected to engage with Chinese authorities on resuming exports of less sensitive products. Trump announced that he will visit China in April, with Xi set to make a reciprocal trip to the U.S., highlighting a renewed effort to stabilize relations through direct diplomacy.

Economically, the truce eases short-term uncertainty for businesses and investors, many of whom feared a reintroduction of tariffs exceeding 100 percent once the previous truce expired. By avoiding an immediate escalation, the deal offers temporary relief to industries dependent on cross-border trade in electronics, logistics, and manufacturing inputs. It may also help cool inflationary pressures tied to higher import costs.

The Fed ends its Quantitative Tightening program

The Federal Reserve has announced that it will soon stop shrinking its balance sheet and start modestly expanding it again, a move aimed at stabilizing U.S. debt markets after months of concern about the government’s growing borrowing needs. The decision marks the end of the Fed’s three-year program of “quantitative tightening” (QT), a process through which the central bank has been reducing the amount of bonds it holds to withdraw excess liquidity from the financial system.

Fed Chair Jay Powell confirmed that the central bank is preparing to begin net purchases of U.S. Treasuries as early as the first quarter of 2026. Analysts expect the Fed to buy around $35 billion in Treasuries each month, which would grow its $6.6 trillion balance sheet by roughly $20 billion monthly, even as it continues to let its holdings of mortgage-backed securities decline. These purchases are not intended to stimulate the economy, as in past “quantitative easing” (QE) programs, but rather to maintain what officials call an “ample reserves” system, keeping enough liquidity in the banking system to ensure smooth functioning of monetary policy and credit markets.

The Fed’s shift comes after signs that QT was starting to strain short-term funding markets, where banks and financial institutions borrow cash for day-to-day operations. By halting QT, the central bank is addressing concerns that it might inadvertently tighten financial conditions too much, just as the economy shows signs of slowing.

Markets have reacted positively. Investors had grown uneasy about the U.S. government’s ability to finance its large budget deficits, currently around 6 percent of GDP, without pushing borrowing costs higher. The Fed’s signal that it will resume buying Treasuries has helped ease those fears by increasing demand for government bonds, which tends to lower yields. The yield on the 10-year Treasury note, a global benchmark for borrowing costs, has fallen from nearly 4.8 percent earlier this year to below 4.1 percent. The narrowing gap between Treasury yields and interest rate swap rates, a measure of investor anxiety over debt supply, suggests that concerns about a debt glut are subsiding.

This easing has also shown up in the shape of the yield curve, which has flattened as long-term yields declined relative to short-term ones. That shift indicates that investors expect less upward pressure on borrowing costs in the future. Similar patterns have emerged in the UK, where government bonds (gilts) have also rallied in recent weeks.

US and South Korea seal trade deal 

The United States signed another important trade agreement this week: with South Korea it reached an  agreement that will lower U.S. tariffs on South Korean car imports in exchange for a massive $350 billion investment commitment by Seoul. The deal, announced during President Trump’s visit to South Korea for the Asia-Pacific Economic Cooperation (APEC) summit, underscores Washington’s strategy of using trade leverage to attract foreign investment and strengthen supply chain partnerships in key industries.

Under the agreement, U.S. tariffs on South Korean cars will be reduced from 25 percent to 15 percent, placing the country’s auto exporters on a more level playing field with Japan, which enjoys the same rate under its own trade deal with Washington. The automotive sector is central to South Korea’s export economy, with vehicles accounting for roughly one-third of its total exports to the U.S. last year.

In return, South Korea has pledged to channel $350 billion into U.S. projects. Of this amount, $200 billion will come as direct cash investments, capped at $20 billion per year, while the remaining $150 billion will be tied to a new shipbuilding partnership. Profits from these investments will be shared between the two countries until the initial capital is recouped. Oversight of the projects will be handled by a committee led by U.S. Commerce Secretary Howard Lutnick.

The deal must still be ratified by South Korea’s National Assembly, which is controlled by President Lee Jae Myung’s Democratic Party. Domestic debate is expected, as some lawmakers have voiced concerns about the scale of the commitment and its potential to drain foreign reserves. However, the governor of the Bank of Korea, Rhee Chang-yong, noted that the gradual pace of annual investments would likely have a neutral effect on the value of the won, South Korea’s currency.

For Seoul, the agreement secures two important advantages. First, it narrows the competitive gap between South Korean and Japanese automakers in the U.S. market. Second, it ensures that any future U.S. tariffs on semiconductors, one of South Korea’s most important exports, will not disadvantage its chipmakers relative to rivals in Taiwan.

ECB holds rates steady 

The European Central Bank (ECB) kept its benchmark interest rate unchanged at 2 percent for the third consecutive meeting, signaling a pause in monetary easing as the Eurozone shows early signs of economic resilience. The decision matched market expectations and reflected President Christine Lagarde’s conviction that the ECB’s policy stance is “in a good place”, a phrase she repeated to emphasize stability amid global uncertainty.

Fresh Eurostat data showed that Eurozone GDP grew by 0.2 percent in the third quarter, slightly above expectations. The modest upturn was driven largely by strong growth in France, where output expanded at its fastest pace since 2023, while Germany continued to lag with persistently weak industrial activity. Lagarde highlighted that the region’s growth was supported by a surge in investment in digital services, as European companies increasingly modernize their IT systems and integrate artificial intelligence into business operations.

Lagarde also pointed to improving global conditions as a source of support. Easing geopolitical tensions, including a ceasefire in Gaza, renewed cooperation between Washington and Beijing, and a trade deal between the EU and the U.S., have reduced some of the external risks that weighed on the Eurozone’s outlook earlier in the year.

Despite signs of recovery, the ECB remains cautious. Inflation, which peaked above 10 percent during the energy crisis, has cooled significantly and is expected to edge down to 2.1 percent in October, close to the ECB’s 2 percent target. However, Lagarde described the inflation outlook as “broadly unchanged,” suggesting the central bank is not yet convinced that price pressures have fully stabilized.

Financial markets reacted calmly. The euro held steady, though it slipped slightly against a strengthening dollar. Swaps markets continued to price in roughly a 40 percent chance of another quarter-point rate cut by mid-2026, signaling that investors expect the ECB to maintain a slow and cautious pace of policy adjustment.

Exxon and Chevron boost oil production despite supply glut concerns

ExxonMobil and Chevron, the two largest American oil producers, are ramping up output even as global energy agencies warn of an impending supply glut that could push oil prices lower. Both companies reported strong third-quarter results, buoyed by record production levels that helped offset the impact of a roughly $10 per barrel drop in crude prices over the past year.

Chevron’s output rose sharply to a record 4.1 million barrels of oil equivalent per day, up more than 20 percent from a year earlier. Much of this increase came from its $53 billion acquisition of Hess, completed in July, which added nearly half a million barrels per day to production. Additional gains came from expanded operations in the United States and Kazakhstan. Despite lower oil prices, Chevron managed to post quarterly earnings of $3.5 billion, down from $4.5 billion last year but above market expectations. The company emphasized that its portfolio remains profitable even in weaker price environments, signaling confidence in its cost discipline and asset strength.

ExxonMobil also reported record production, driven by strong performance in its key fields. Output in the Permian Basin, the largest oilfield in the U.S., surpassed 1.7 million barrels of oil equivalent per day, while production from Guyana reached 700,000 barrels per day. Overall, Exxon produced 4.8 million barrels per day, its highest level since the merger with Mobil over two decades ago. The company earned $7.5 billion in the quarter, beating forecasts despite being below last year’s $8.6 billion. Exxon’s CEO Darren Woods noted that earnings per share were the highest achieved in comparable oil price conditions, reflecting improved operational efficiency and productivity.

Both firms are making a strategic bet that global demand for oil will remain strong enough to absorb growing supplies from OPEC+ and other producers. This optimism contrasts with forecasts from the International Energy Agency, which predicts a potential surplus of four million barrels per day next year. A glut occurs when supply exceeds demand, pushing prices down and squeezing producers’ profit margins. 

China’s industrial slowdown deepens pressure on economic strategy

China’s factory sector contracted for the seventh consecutive month in October, signaling persistent weakness in domestic demand at a delicate time for policymakers. The Purchasing Managers Index, often used as a real-time snapshot of industrial health, slipped to 49. Any reading below 50 indicates shrinking activity, so this suggests Chinese manufacturing is still losing steam. The drop also missed economists’ expectations, highlighting how the recovery remains fragile.

Several forces are working against China’s factories. A long national holiday slowed operations in early October, but deeper structural challenges are doing more of the damage. The trade tensions with the United States has also pushed Beijing to focus on becoming more self sufficient in technology and advanced manufacturing. At the same time, the country’s property slump continues to weigh on consumer confidence, reducing domestic spending and the demand for manufactured goods.

There were areas of improvement, particularly in high tech and equipment manufacturing, sectors that are central to China’s long term industrial ambitions. Some consumer facing industries, helped by government subsidies and holiday travel demand, also showed modest growth. This kept the broader non manufacturing PMI in expansionary territory at 50.1, thanks in large part to transport, tourism and entertainment.

Still, the underlying indicators in manufacturing remain troubling. New orders fell, inventories of raw materials dropped and factories reduced hiring. These point to businesses preparing for weaker demand ahead rather than a rebound. Even though exports were surprisingly resilient in September, policymakers are increasingly worried that fierce competition among Chinese producers is eroding profits and pushing prices down. This trend, known as deflation, discourages investment and can slow growth further. Government intervention targeting sectors like electric vehicles and solar panels aims to prevent destructive price wars, but could inadvertently cool production.

Economically, the risk is that China becomes too dependent on exports in a world where demand is slowing and geopolitics are uncertain. Without a convincing recovery in household spending and investment, momentum could continue to fade. Analysts warn that even if relations with the US improve, any trade related boost is unlikely to offset the broader headwinds facing China’s economy.