Trump’s tariff threat roils markets
Donald Trump caused a stir in markets on Friday afternoon. His threat to slap a ‘massive’ additional 100% tariff on China from 1st November- in response to the latter’s imposition of export controls on rare earths – led to a sharp sell-off in equity markets and a fall in bond yields, while the dollar gave up ground although its losses were modest enough. The 1st November deadline leaves plenty of opportunity for ‘negotiations’ to take place, and so the threatened tariff hike may not come to pass at all, but markets may be subject to some volatility in the meantime. Markets will also be watching developments in France, where the reappointed Prime Minister is trying to get a budget for next year passed through parliament. In FX, the euro and sterling kick off the day trading at around $1.1615 and $1.3340 against the dollar respectively, off last week’s lows of about $1.1540 and $1.3260, while EURGBP remains in and around the £0.87 level.
US government bond yields fell sharply following Trump’s latest tariff threat with 2- and 10-year yields ending down around 10bps on Friday, leaving them back close to their lows for the year. Equivalent German and UK yields also finished lower on the day, falling by around 4-6bps. In equity markets, the Nasdaq led the sell-off in US stocks, shedding 3.5% on Friday, with the S&P losing 2.7%, while European stocks were off around 1.5%.
Fed Governor Waller says he favours cutting interest rates further but cautions against doing so “aggressively”. He notes that while the labour market has softened recently, economic growth still appears reasonably solid, arguing that “something’s got to give, either the labour market rebounds to match GDP growth, or GDP growth is going to pull back…but whichever way that goes, it’s got to affect what you do with interest rates.”
Looking to the week ahead, the ongoing government shutdown in the US means a continuing delay to most economic data releases there, though the Fed publishes its latest Beige Book ahead of its next monetary policy meeting at the end of this month. Elsewhere, data of note include labour market and GDP reports in the UK on Tuesday and Thursday respectively, while Euro area industrial production is scheduled for tomorrow. There are quite a number of Fed, ECB and BoE members due on the wires over the course of the week, including Fed Chair Powell who gives a speech on the outlook for the US economy and monetary policy tomorrow.