Jerome Powell soothed investors’ nerves yesterday by striking a more dovish tone than expected on monetary policy and interest rate easing. However, the relief for Wall Street may prove short-lived as President Trump has reignited tensions with China over soybeans.
Yesterday afternoon, at a meeting of the National Association for Business Economics in Philadelphia, the Fed chairman said that in the absence of government data, Federal Reserve data and private data were used to monitor the economy. The result is familiar: the outlook for inflation and employment is relatively unchanged from the Federal Open Market Committee (FOMC) meeting last month.
During the second half, concerns grew that two parts of the Fed’s mandate – 2% inflation and stable employment – could be in tension with each other, with inflation requiring higher rates to calm the economy and curb rising prices, while slowing job growth would require lower rates in order to stimulate economic activity.
FOMC members had suggested that after viewing inflation as the most pressing aspect of the problem for some time, they were now rebalancing their view. Powell suggested that employment had weakened further, saying: “While the unemployment rate remained low through August, payroll gains slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation. In this less dynamic and somewhat softer labor market, downside risks to employment appear to have increased.”
He added that while official data from the Bureau of Labor Statistics is delayed due to the government shutdown, “available evidence suggests that layoffs and hiring remain weak, and that households’ perceptions of job availability and businesses’ perceptions of hiring difficulties continue their downward trajectory.” »
And while Powell – who drew the president’s ire this year for not cutting rates as soon as he would have liked – reiterated that short-term inflation remains stable at nearly 3%, he nevertheless clarified that “most long-term anticipation measures remain aligned with our 2% target.” Analysts may have particularly liked this because it suggests Powell is willing to “ignore” tariff-related inflation, which is expected to hit in the coming months, but leave it out of the path of monetary policy as a one-time hit to prices.
While the president added that “we will set policy based on the evolving economic outlook and the balance of risks, rather than following a predetermined path,” investors heard enough of what they wanted to remain optimistic about further cuts – reason to celebrate because lower rates mean cheaper borrowing for businesses and consumers. According to the CME’s FedWatch barometer, the probability of a 25 basis point cut at the Fed’s October meeting is now almost 96%, up from 94% a week ago.
But the trust didn’t last long. Deutsche Bank’s Jim Reid noted to clients this morning: “Markets have certainly had quite the ride since Friday’s trading escalation, with many changes in sentiment over the next two or three days. The last 24 hours have been a microcosm of that with the S&P 500 (-0.16%) only slightly down after rebounding sharply from lows of around -1.5% just after the open, then rebounding again on the highs of around +0.4% a few hours before the New York close. The rebound was sparked by dovish comments from Fed Chairman Powell after Europe returned, but a late social media post from President Trump reignited some fears of an escalation between the United States and China.
Clouds are gathering over China
Markets are mixed before the bell this morning as investors digest the good news from Powell and the alarming update from President Trump. S&P 500 futures were up 0.59% this morning after the index closed down 0.16% yesterday; The Nasdaq Composite was down 0.76%. Conversely, the Dow Jones increased by 0.44%. The European markets are all up slightly: the German DAX up 0.23%, the Parisian CAC 40 up around 2.5% and the Euro STOXX 50 up 1.45%. In Asia, the Nikkei 225 and Hang Seng indices both rose more than 1.7%.
But perhaps the most notable change was the VIX volatility index, which rose 3% last night. Investor expectations for increased volatility likely came (as is becoming a trend) in the form of President Trump’s social media.
Trump posted on Truth Social last night: “I believe that China’s deliberate failure to purchase our soybeans and cause hardship to our soybean farmers is an economically hostile act. We are considering ending business with China on cooking oil and other items of trade in retaliation.”
Talk of retaliation is the exact opposite of what markets were hoping for and represents a new U-turn by the White House in its relations with Beijing. On Friday, Trump threatened to impose 100% tariffs on his largest trading partner, before guaranteeing a deal would be reached. It comes as the latest data on Chinese exports shows Washington may not have as strong a hand as it believed in the trade war, with Chinese exporters reporting that growth has been focused on trade with the rest of the world rather than the United States.
Here is an overview of the markets this morning:
- S&P 500 futures are rising 0.59% this morning before the opening bell in New York. The index was down 0.16% yesterday.
- The STOXX Europe 600 was up 0.66% at the start of the session.
- The UK’s FTSE 100 was down 0.2%.
- Nikkei 225 in Japan was up 1.76%.
- The Chinese CSI 300 was up 1.48%.
- South Korea’s KOSPI was up 2.68%.
- India’s Nifty 50 was up 0.68%.
- Bitcoin was stable at $112,643.
