While the spotlight was expected to be on Fed Chair Powell at Jackson Hole on Friday night, his keynote address ended up being overshadowed by a further escalation in the US-China trade war. China announced it would retaliate with tariffs on $75 bln of US imports, followed by Trump announcing that he would add an additional 5% tariff on all $550 bln Chinese imports.
Equity markets plunged, bond yields fell sharply, safe haven currencies appreciated and the AUD and CNY underperformed. The USD weakened after Trump complained about the strong USD, raising speculation that the US could consider unilateral currency intervention.
The NZD performed well amidst the risk-off backdrop, and ended the week at 0.64, supported by comments by RBNZ Governor Orr that suggested the bar for a September OCR cut is quite high.
Two hours ahead of Fed Chair Powell’s eagerly awaited keynote address at the Jackson Hole conference, China officially announced its response to Trump’s latest round of import tariffs. China will levy an additional 5% tariff on $75 bln worth of US imports from the 1st of September, with a 25% tariff on US cars and 5% tariff US auto parts reinstated from December 15th, matching the split time-frame for the latest round of US tariffs on China. Among the US imports to be affected are soybeans and other agricultural goods as well as US crude oil, for the first time.
Powell described the three weeks since the Fed’s July meeting as “eventful”, with the announcement of new tariffs on Chinese imports, further evidence of slowing in global growth, various geopolitical risks including Brexit and the Hong Kong protests, and sizeable financial market volatility. On trade, Powell said there were “no recent precedents” for the current situation” and that “while monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade.” Powell repeated the now familiar refrain that the Fed will “act as appropriate to sustain the expansion”. While he noted “the US economy has continued to perform well overall”, Powell’s articulation of the growing downside risks reinforced the market’s expectation that that the Fed will cut rates again at its meeting next month.
The combination of China’s retaliatory actions and Powell’s speech generated a flurry of irate Twitter activity from Trump shortly thereafter. Giving the impression he was expecting Powell to announce an intra-meeting rate cut, Trump claimed “As usual, the Fed did NOTHING! It is incredible that they can “speak” without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the U.S. will do great… my only question is, who is our bigger enemy, Jay Powel [sic] or Chairman Xi?” This was followed by another tweet where Trump said the US didn’t need China and that US firms were “hereby ordered to immediately start looking for an alternative to China.” Trump later claimed the International Emergency Economic Powers Act of 1977 gives him the power to do that, and while some commentators are dubious, he could still declare a national emergency and make life increasingly difficult for US firms operating in China if he wished.
China’s tariff announcement, which Chinese officials had warned about some weeks ago, caused a modest sell-off in equity markets. This was mostly reversed after what was interpreted as a dovish-sounding speech from Powell. But Trump’s Twitter barrage then sent equities and bond yields falling sharply. The S&P500 ended the day down 2.6% with the NASDAQ 3% lower. The trade-exposed energy, information technology and consumer discretionary sectors led declines on the S&P500.
Just after the market close, Trump announced – again via Twitter – that the US would increase tariffs on the existing $250b of Chinese imports from 25% to 30% from October 1st and the remaining $300b of Chinese from 10% to 15% (with some of those goods being affected from September 1st and the remainder from mid-December). The weekend editorials in the state-owned People’s Daily showed no signs that China is thinking of backing down, with one saying “China is confident in pursuing its own path and doing its own business well, and will firmly oppose any inflammatory stance by the U.S.” while another said China would fight the trade war until the end.
Overnight, Trump acknowledged he had had “second thoughts” about the trade war escalation. A later statement from the White House dashed hopes that he might change course and clarified his comments by saying Trump “regrets not raising the tariffs higher.”
There was again eye watering volatility in the global rates market, with the US 10 year Treasury yield falling from an intraday high of 1.66% earlier in the session to a low of 1.5% in the aftermath of Trump’s tweets (it closed at 1.54%). The 2y10y yield curve again flirted with inversion despite the market boosting its rate cut expectations for the Fed. The market now prices around 30bps for the Fed’s September meeting, implying some risk of a 50bp move. There were a number of other Fed officials speaking on Friday as well, all completely overshadowed by events elsewhere. Dallas Fed President Kaplan, speaking before the trade news broke, said he would “like to avoid having to take further action, but I think I’m going to have an open mind”, while influential Fed vice Chair Richard Clarida told CNBC “obviously, the global economy has worsened since our July meeting… and there’s powerful disinflationary pressures.”
The USD fell sharply after Trump’s tweets, with the market possibly linking his complaint about the “very strong dollar” and generally hostile response as suggesting an increased risk of US currency intervention. The USD was down by 0.4% to 0.5%, in index terms, on Friday. Safe haven currencies predictably outperformed, with the Japanese yen and Swiss franc both up by around 1%, while the AUD was the worst performing G10 currency, flat on the day against the USD. The offshore renminbi fell around 0.6%, with USD/CNH closing around 7.13, close to its recent highs. All eyes will be on the CNY fix today.
The NZD performed relatively well amidst the decline in the CNY, to which it has been closely correlated to since the trade war broke out, and the broader risk-off backdrop. The NZD was 0.6% higher on Friday and closed the week at 0.64, supported by comments made by RBNZ Governor Orr in Jackson Hole during the Asian trading session. Orr said the RBNZ could "afford to watch, wait and observe what is happening...we will have to see what the situation is in November and be willing to continue to cut if necessary." The comments imply that the bar is quite high for a September rate cut and the market pared back its probability such a move to 15% at the close to trading on Friday. Swap rates rose by 3bps to 4bps. OCR rate cut expectations are likely to shift higher again today however, and NZ rates fall, after the weekend’s trade developments. Separately, Orr reiterated that negative rates would be his preferred unconventional policy tool, if the need arose, although he said that was "far from our central scenario" and the RBNZ’s decision to cut by 50bps earlier this month should reduce the probability of the central bank needing to do more later.
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