Last week Wednesday was the much-anticipated interest rate decision by the US Fed. The market had become increasingly certain of at least a 0.25% cut and some people event thought a 0.5% cut could be possible. Economic data out of the US have been surprisingly good recently which made the chances of the latter very slim.
As most expected, the US Fed decreased interest rates by 0.25%. The statement by Jerome Powell that followed the rate decision was confusing however. It created uncertainty, and the market reacted negatively instantly.
After the initial confusion and sell-off, the markets had recovered quite well. That was until Trump decided to ramp up the tariff threat on China by imposing an additional 10% on $300 billion of Chinese goods that would start the 1st of September. Global markets were again sold off heavily as a result.
The pain was extended on Monday as China retaliated over the weekend with asking their state buyers (SOEs) to stop importing US agricultural goods. China’s hand has essentially been forced with Trump publicly criticising them, mainly accusing them of not buying the large amounts of agricultural products they had promised. This has escalated the trade war to a new level with no resolution in sight anytime soon.
After the biggest down day for the year so far on Monday, the markets have recovered only slightly. Markets are yet to bounce with any real conviction. If this retaliatory behaviour continues, the US Fed will be forced to cut interest again soon. Goldman Sachs analysts now see a 75% of another 0.25% rate cut in September, and a 50% chance for a 0.25% rate cut in October. This will largely be determined by what happens between the US and China until then, and what impact the economic data shows.
The underlying message from the US Fed however remains the same – they will use the tools they have at their disposal to continue the economic expansion.