A roller-coaster of a week starting with President Trump announcing additional tariffs on China imports with existing 25% tariffs on $250bn of imports from China will be raised to 30% starting on Oct 1. The 10% tariff on about $300bn of imports from China (about half of which have been delayed to Dec 15) will be increased from 10% to 15%. Effectively on Sep 1, a part of the $300bn will be tariffed at 15% and on Dec 15, the remaining imports will be tariffed at 15%. Markets gained a reprieve after the initial collapse as reports of an alleged call from China to restart trade talks which seemed to be supported by Vice Premier Liu He saying they were willing to solve the trade problem “through consultation and cooperation with a calm attitude” bringing new hope to the financial system. That hope is fading today as it is becoming increasingly unclear whether any call from China happened at all. The one deal that was thought to solid came under doubt, with Japan insisting it wanted the U.S. to end the threat of new tariffs on autos before finalising an agreement.
The events of Jackson Hole were overshadowed by the continuing trade war however, Chair Powell managed to walk the fine line of not deviating from the “mid-cycle policy adjustment” mantra but at the same time acknowledging that developments since the July meeting have been “eventful”. The Fed Chair’s remarks came across as dovish but without a clear indication how far the Fed will ease monetary policy. The market continued to bull flatten the Treasury curve and support USD. Gold could shed some gains, particularly given the extended long positioning However, the market was too busy on their phones waiting for the next curve-ball tweet to take much notice.
In retaliation, China announced retaliatory tariffs on $75bn of imports from the US (5% on soybeans, 5% on crude oil, etc on Sep 1, and 25% on autos on Dec 15th). Trump didn’t like that Powell wasn’t more dovish and called Powell an enemy. He also threatened some action on China and that he would deal with the strong dollar and the weak Fed. He also announced that “American companies are hereby ordered to immediately start looking for an alternative to China”.