The Week Ahead – Still looking cloudy from the summit

PodcastThe Week AheadRuchir SharmaSep 25

The discussion weighs the outlook for the U.S.-China trade truce, political uncertainty in Germany and France, and limited prospects for U.S.-China AI cooperation. Forecasts point to persistent inflation pressures, resilient labor conditions, and differing rate paths across the Fed, RBA, and ECB. Markets have turned risk-off as oil and Treasury yields rise, while rare-earth shortages and widening European bond spreads add to pressure.

Trade Policy China Geopolitical Risk Inflation Interest Rates Energy Markets

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Key Takeaways

The U.S.-China trade truce was extended through January 10, and the guest expects the summit to prioritize another extension over a major breakthrough, with possible limited tariff cuts covering roughly $30 billion in products. By contrast, the guest sees little scope for U.S.-China AI cooperation as competition intensifies.

Political calendars and leadership risks could complicate policy progress in Europe: the guest says further CDU setbacks could put Merz’s position at risk and potentially open a path for Germany’s fiscal agenda, while France’s April presidential and June parliamentary elections may leave little incentive to pass a budget for the following year.

The guest expects U.S. core PCE inflation to run at 0.28% monthly and 3.3% year over year, with annual revisions potentially lowering the year-end reading to about 3.2%; the guest says that trajectory fits one more Fed hike in December followed by an extended hold. Resilient private payroll growth around 120,000 and subdued layoffs are also expected to keep the Fed focused on inflation rather than labor-market risks for now.

GEO-POLITICS

Trade Truce — The U.S.-China trade truce was extended through January 10, giving both sides breathing room and limiting the risk that renewed tariff escalation would add to U.S. price pressures. The guest expects the summit to focus on extending the truce rather than securing a major breakthrough, though limited reciprocal tariff reductions could cover roughly $30 billion in products. Possible measures include lower U.S. tariffs on some nonsensitive products, lower Chinese tariffs on some U.S. agricultural and energy products, and increased Chinese purchases.

“We saw that just as president Xi arrived, treasury secretary Bessent announced that the trade, the trade truce that has been extended by another two months, so that now runs…”—

CDU Leadership — The CDU performed poorly in recent state elections, including failing to clear Mecklenburg-West Pomerania’s 5% threshold for representation. The AfD gained popularity and seats but did not secure an outright majority. The guest says further CDU setbacks next year could lead to Merz being replaced, though a snap general election is not expected. A new leader could potentially build momentum for Germany’s fiscal spending and reform agenda, which Merz has struggled to advance.

“And actually, in one of the state elections in particular, the Mecklenburg, West Pomerania, the CDU failed to achieve the 5% threshold required to enter into the local state legislature…”—

TECHNOLOGY

AI Dialogue — The guest sees limited scope for U.S.-China collaboration through a proposed AI dialogue mechanism, given intensifying competition between the countries. The guest also recounts Bessent’s warning that China is close behind the U.S. in AI and that a Chinese win would have severe consequences.

“Another big focus for the summit is about this so called AI dialogue mechanism to reduce the risk from the rapid AI development…”—

ECONOMY

Core PCE — The guest expects monthly core PCE growth of 0.28% and year-over-year growth of 3.3%. Annual revisions to software and portfolio management components could lower the year-end measure by two to three tenths, to roughly 3.2%. The guest says this inflation trajectory is consistent with one more Fed rate hike in December, followed by an extended hold.

“So broadly, we think that inflation trajectory remains consistent, with our expectations of one more hike in December followed by an extended hold.”—

Labor Resilience — The guest expects private payroll growth to remain around 120,000. Lower continuing claims and firms’ hiring plans point to subdued layoffs and resilient labor-market conditions. AI-related investment is also spilling over into construction and manufacturing employment. The guest says this should keep the Fed focused on inflation rather than labor-market risks for now.

“So we expect private payrolls growth to remain, around 120 k. Government hiring should slow somewhat. So more broadly, have seen that labor market fundamentals, they've been encouraging…”—

China PMI — The guest expects China’s official manufacturing PMI to rise from 49.8 in August to around 50 in September, citing seasonality, strong export momentum, and more supportive policy. Domestic demand remains weak, however, and the improvement could be short-lived, with a pullback possible in October.

“Number two, the momentum in export sector remains quite strong, you know, because of the global super AI cycle…”—

MARKETS

Risk-Off Shift — The host describes a shift to a risk-off tone. Brent crude was approaching $107 per barrel after briefly dipping below $100. The 10-year U.S. Treasury yield moved decisively above 5% following hot U.S. PMI data, while the U.S. dollar’s strength appeared to be continuing.

“That uncertainty is also reflected in volatile oil markets with Brent crude now approaching $107 per barrel again after dipping briefly below 100 this week…”—

Rare Earths — Shipments of rare earths from China have been under pressure, and manufacturing firms have reported shortages of critical inputs that have constrained production.

“We think rare earth should be an important part of the conversation as well, since shipments from China, they've been under pressure for some time…”—

Oil And Treasury Yields

The host describes a risk-off turn as oil and Treasury yields rise, then previews the trade summit, key data releases, and regional central-bank decisions.

U.S.-China Trade Truce

The U.S. guest expects the extended trade truce to provide breathing room, while rare-earth shortages remain a concern and prospects for AI coordination are uncertain.

Fed Inflation And Jobs

The U.S. outlook calls for persistent inflation and resilient hiring, leaving the Fed focused on inflation and supporting one more rate hike before an extended hold.

China Summit And PMIs

The China economist expects a modest extension of the trade truce rather than a major breakthrough, limited AI cooperation, and a seasonal September PMI improvement that may fade.

RBA Rate Hike Outlook

The Australia economist assigns a 70–75% chance to a 25-basis-point RBA hike, citing inflation pressures, stronger growth, and high labor costs.

German Political Uncertainty

Poor state-election results weaken Merz and the CDU, though a leadership change could potentially revive Germany’s stalled reform and fiscal-spending agenda.

French Bond Spread Risks

Rising French yields reflect fiscal and political uncertainty, with expected rating downgrades and debt concerns likely to keep French-German spreads widening.

European Inflation And ECB

Higher oil prices are expected to lift September inflation, and a sharp upside surprise could revive market pricing for an October ECB hike, though December remains the forecast.