Jerome Powell’s remarks in Jackson Hole took on a bit of added urgency on Friday morning when China rolled out retaliatory measures in response to the Trump administration’s next round of tariffs.
News that Beijing will hit an additional $75 billion of US products with levies rippled across markets, throwing US equity futures for a loop and sending investors scurrying for safety.
The prospect of new tariffs on soybeans sent futures lower. They had traded higher prior to the China headlines. This is just more bad news for America’s beleaguered farmers.
Beijing will hit US crude imports with with a 5% tariff starting on September 1. That news, combined with generalized angst about the extent to which the protracted trade dispute will entail demand destruction as the global economy suffers, sent WTI lower by 3% on Friday. The spread to Brent widened and this would appear to increase the chances of BofA’s “uber-bear” thesis playing out.
Meanwhile, Beijing’s decision to reinstate 25% tariffs on US autos starting December 15 is bad news all the way around. It means a reversal of China’s previous position at a time when auto sales in the country were already in a tailspin.
Further declines in crude have the potential to undermine inflation expectations, sending breakevens even lower. 5- and 10- breakevens have tumbled some 20bps since the July FOMC. More trade tensions will also translate into dollar strength against everything but “pure” havens. In other words, the trends in the top pane of the following chart (see the yellow arrows) have the potential to keep running.
Ominously, the offshore yuan pushed above 7.10 on Friday morning.
Again, this all raises the stakes for Powell and the Fed. Maybe that’s just evidence that the administration’s “strategy” is unfolding according to plan, but somehow, we doubt it.
