This week, the U.S. Fed and the trade war each took turns knocking global stocks down from recent highs. On Wednesday, the Federal Reserve cut interest rates by 0.25%, but Chairman Jerome Powell indicated additional rate cuts were far from certain, leaving investors wanting more. Stocks began to rebound Thursday until President Trump threatened new tariffs on China, potentially escalating the trade war and diminishing hopes of a speedy resolution. Markets sold off sharply on the news with investors seeking safety in bonds and gold.
S&P 500: 2,932 (-3.1%)
FTSE All-World ex-US (VEU): (-3.2%)
US 10 Year Treasury Yield: 1.86% (-0.22%)
Gold: $1,441 (+1.6%)
USD/EUR: $1.111 (-0.2%)
- Tuesday – Led by Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin, and China’s Vice Premier Liu He, trade talks resumed between the U.S. and China in Shanghai.
- Tuesday – The Case Shiller U.S. Home Price Index showed slowing growth in the month of May, with Seattle posting one of the first percentage declines for a major city in years.
- Tuesday – Despite slowing iPhone sales, Apple reported better than expected results on strength at virtually all of its supporting businesses.
- Wednesday – The U.S. Federal Reserve cut interest rates by 0.25%, the first such reduction since 2008.
- Thursday – President Trump announced he would add new 10% tariffs on $300 billion in Chinese goods starting September 1st.
- Friday – U.S. nonfarm payrolls increased 164,000 in July, showing steady strength and keeping the jobless rate at 3.7%.
The Fed Cuts Rates by 0.25%
Two major events drove markets this week. On Wednesday, the U.S. Federal Reserve cut interest rates for the first time since the Financial Crisis. While the 0.25% cut was largely expected, investors were disappointed Powell’s commentary didn’t clearly set expectations for a larger easing cycle. In our view, we don’t think the cut was fully necessary, but its impact should be minimal and we understand the Fed views it as an insurance policy against external threats to growth. And as we’ve pointed out elsewhere, The Fed is usually supportive heading into the fourth year of a President’s term.
The second event came Thursday when President Trump made a surprise announcement of 10% tariffs on an additional $300 billion in Chinese goods. The new tariffs, which if carried out would be effective September 1st, came amidst frustration over stalled progress in this week’s trade talks in Shanghai. The President also mentioned his dissatisfaction with China failing to follow through on prior commitments, such as the purchase of more U.S. agricultural products.
Both of these events are intertwined, in that the trade war has been a primary driver of increased global uncertainty. And that in turn is helping fuel the Fed’s more cautionary stance. This week’s escalation, if the tariffs do come to pass, will only add more uncertainty. But there’s no guarantee of this, as we’ve seen threats like these before only to have them withdrawn at the last minute. Either way, if new tariffs take effect, and there is any softening in economic data, the Fed very well could embark on a larger easing cycle. At least historically speaking, it’s rare for the Fed to cut rates only once.