The cross-asset reaction to the latest tariff news was dramatic.
The USTR’s decision to delay the imposition of duties on some key items until December 15 suggests the Trump administration is at least aware of the possibility that the next round of tariffs could seriously dent the outlook for the US economy at a time when growth is already slowing as the fiscal impulse wanes.
Risk asset performance since August 1 (when Trump tweeted the latest threat) reflects palpable jitters and China’s response last week (letting the yuan fall through the psychologically important 7 level) suggested Beijing had run out of patience.
Although Trump has insisted he’s unconcerned about the market implications of the latest escalations, Tuesday’s coordinated announcements from the USTR and China’s Commerce Ministry (which released a statement almost simultaneously) shows the White House wants the situation to stabilize. After rebounding from a harrowing six-day plunge that culminated in the August 5 bloodbath, Wall Street cratered anew on Monday, rekindling concerns that a meltdown might be imminent.
Fast forward to Tuesday and the offshore yuan rallied more than 1.3%, a massive gain that rivals the scope of the August 5 plunge engineered by the PBoC.
For the Nasdaq, Tuesday was set up to be another banner session just days after the August 8 surge.
Semis are obviously loving the trade news, which sparked a rally large enough to make August 13 one of the best five days of 2019 for the SOX if it can hold.
Now, one of the big questions is what this will mean for the Fed. Obviously, any deescalation of trade tensions will reduce the near-term uncertainty, but kicking the can to December vis-a-vis tariffs on key items with the potential to move the needle on inflation could also be seen as clouding the outlook to the extent nobody knows what will ultimately happen between now and then.
Additionally, it’s possible that the administration is attempting to give the Fed some cover when it comes to cutting rates again in September, by removing the threat of imminent tariff-related price pressures. That said, it’s not clear that simply putting the decision off for three months is going to make too much of a difference in that regard.
The 2s10s was on the verge of inverting Tuesday when the trade news shook things up. The curve actually flattened further after the headlines crossed with the 2-year cheaper by 7bps on the day. The tariff headlines came a little over an hour after the latest read on consumer prices found core CPI coming in hotter than expected for a second straight month.