The Market Today

Markets Blindsided By Trade Escalation As They Awaited Powell’s Speech

by Craig Dismuke, Dudley Carter


Fed Chair Powell’s Unenviable Spotlight: Pushback on rate cuts from his comrades in recent days (some below), and Wednesday’s hawkish-leaning July Minutes that depicted a divided Committee, have brightened the spotlight on Fed Chair Powell’s speech from Jackson Hole. Powell tripped up markets after the July decision when he couldn’t clearly explain why the Fed had cut rates when the data appeared stable, and after he characterized the move as a “mid-cycle adjustment.” The Minutes showed most officials agreed with that description of the cut, as a sort of fine-tuning “recalibration.” Additionally, the hard-to-quantify trade worries, a major factor behind the Fed’s decisions to ease, have since worsened. Powell will receive the market’s undivided attention today as he attempts to recover from that clumsy post-meeting conference, and bridge the gap between those officials that see reasons for rate cuts, and those that see reasons to wait. His remarks are unlikely to fully satisfy a market seemingly stuck in limbo, and therefore almost inevitably will result in some intraday excitement for investors.

Bullard Said The Fed Should Do More: Already this morning, St. Louis Fed President Bullard joined the cacophony of Fed officials who’s disparate opinions have contributed to complicating Powell’s task from behind the podium. Bullard said the U.S. labor market and consumer are still strong, but “There is some downside risk, and I would like to take out more insurance against the downside risks.” Trade and global growth are top worries at the Fed, but Bullard believes the effect on the yield curve creates a risk of its own and echoes the need for easing. “The yield curve is inverted here,” Bullard said, “[The Fed Funds rate is] is one of the higher rates on the yield curve here. That’s not a good place to be.” After his spoke, his colleagues from Cleveland (Mester) and Dallas (Kaplan) both said, they were open to easing, but not yet convinced it was needed.

New Home Sales Expected To Rise: New home sales are expected to have inched 0.2% higher in July after a 7% jump in June, which would place the sales pace at one of its strong levels from this cycle.


Rates Moved Up As Officials Tilted Hawkishly Before Powell Speech: The major equity indices closed mixed Thursday as a chorus of contrarian Fedspeak pushed Treasury yields higher despite a couple of notably weak economic reports. Before markets opened, Kansas City Fed President George said July’s rate cut “wasn’t required” and indicated “it’s not yet time…to provide more accommodation to the economy.” Treasury yields, which had begun to trend higher after stronger-than-expected European PMIs, rose more steeply on her comments.

Sentiment Seesawed Between Weak Economic Data And Hawkish Fedspeak: Yields leveled off as equities opened up, but both quickly turned lower after a couple of popular reports showed the economy slowed in August. Markit’s manufacturing PMI contracted for the first time in nearly a decade and the services index matched its weakest level from the last several years. The negativity was enough to send the spread between the 2-year and 10-year Treasury yields back briefly into inversion. Within minutes, Philadelphia Fed President Harker joined George on the more hawkish side of the debate, saying the Fed should “stay here for a while and see how things played out.” An hour later, the Kansas City Fed’s manufacturing index posted its largest contraction since March 2016. Piling on in the afternoon, Philadelphia Fed President Harker said he would like to “avoid…further action” but is keeping an “open mind.”

Hawkish Sounds And Weak Data Could Become Worrisome: While the combination of weaker data and sanguine Fed commentary should seemingly worry investors, the S&P 500 slowly crept back to end the day roughly unchanged. Treasury yields took heed of the Fed’s patient supposition, pushing gradually higher and flatter into the close. The 2-year yield rose 3.9 bps to 1.612% while the 10-year yield added 2.4 bps to close at 1.613%. The pushback on rate cuts from Fed officials through the week, including the July minutes, left Fed Funds futures expecting the weakest Fed response, essentially no chance of a 50-bps cut in September, in three weeks.


Markets Blindsided By Trade Escalation As They Awaited Powell’s Speech: Although the tone has changed within the last hours, stocks were generally stronger overnight and yields ticked higher as the world waited for a Fed Chair Powell’s key speech from Wyoming. U.S. futures had firmed up around 0.4% around 7 a.m. CT, finding support from the Stoxx Europe’s 0.5% overnight rise and relatively widespread gains across Asia. Most sovereign yields had inched higher, the Treasury curve was up between 2 bps and 3 bps, as investors anxiously awaited to hear Powell’s assessment of the economy and uncertainties it faces, and any signal of possible policy moves in the near term.

Trade Tensions Escalated Unexpectedly: One of the major uncertainties continues to be the trade tensions between the U.S. and China that seemed to boil over a day after the Fed cut rates for the first time in a decade. Overnight, the Chinese yuan weakened to a new low since 2008 and an in-the-know journalist said the Chinese government was preparing to fight back. The editor-in-chief of the Global Times, a publications closely tied to the Chinese government, tweeted “Beijing will soon unveil a plan of imposing retaliatory tariffs,” so that “The US side will feel the pain.” Less than two hours, global equity futures reversed sharply lower and Treasury yields erased their rise after China announced retaliatory tariffs in response to the U.S. move against $300B of Chinese goods announced on August 1.

China Announced New Tariffs In Retaliation To U.S. Move Against $300B: According to early reports, China’s new tariffs will range from 5% to 10%, will take effect on September 1 and December 15 to match the U.S. timeline, and will effect $75B of U.S. goods. Additionally, starting December 15 a 25% tariff will be placed on U.S. autos while auto parts will have a 5% tariff levied against them. Starting September 1, soybeans and crude oil will both have a 5% tariff applied. The 2-year yield dropped to down 2.5 bps on the day and the 10-year yield fell 1.4 bps below yesterday’s close.

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