Treasury prices are drifting higher and equities lower in response to China’s trade retaliation, but the move in financial assets is somewhat muted ahead of Jerome Powell’s speech in Jackson Hole this morning. China announced that it will impose additional tariffs on $75 billion of U.S. imports beginning as early as September 1 in retaliation to the new tariffs from the White House. An additional 5% tariff will be applied to American soybean and crude oil imports, and a 25% duty on all U.S. cars sold in China will resume on December 15. China appears prepared to dig in further following reports that President Trump is now concerned about the trajectory of the U.S. economy ahead of the 2020 election.

There is a great deal of market anticipation ahead of Powell’s speech today. The minutes from the July 31 FOMC meeting characterized a Fed that was more aligned on the idea of a mid-cycle adjustment to the fed funds rate, but that was before the recent escalation in U.S./China tensions and significant market volatility.  At the same time, recent core inflation data was higher than expected, and the labor market remains at or close to full employment (Fed’s dual mandate). This is more about how much the Fed feels it needs to do to get ahead of uncertain future events as opposed to be more reactionary to the actual data trend. It’s a delicate balance, and Powell faces a big challenge with his word choice.

Jason Haley
Managing Director, Investment Management Group