Market trading was extremely muted in the run-up to Fed Chair Powell’s speech in Jackson Hole until the Chinese Ministry of Finance unexpectedly retaliated the US by announcing new tariffs. The immediate market response was a classic risk-off one with stocks recording losses and core bonds gaining ground. EUR/USD was gently testing the downside of this week’s 1.1060/1.1110 until the Chinese news weighed on the dollar and put EUR/USD again higher in the range.

Fed Chair Powell said that the US central bank will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2% objective. He noted that developments since the July meeting have been eventful, citing further evidence of a global slowdown, notably in Germany and China, the growing possibility of a hard Brexit, rising tensions in Hong Kong, the dissolution of the Italian government and the latest salvo’s in Trump’s trade war with China. He didn’t specifically refer to additional easing in September but dropped a strong hint by stating that “anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy and that could include uncertainty about trade policy.” He added that the committee remains in heightened risk-management mode. We think that Fed Powell is in the camp of FOMC members willing to add another 25 bps rate cut in September. The market reaction post-Powell was rather small.

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Investors might have been taken partly by surprise by the Chinese announcements and probably fear a US response. Quotes by US President Trump at the G7 Summit in France are a big wildcard. US yields lost only 1 additional bp at the time of writing. EUR/USD, believe it or not, is still stuck around 1.1075. The US yield curve bull steepens in a daily perspective with yields 4.1 bps (2-yr) to 0.9 bps (30-yr) lower. The German yield curve steepens as well with changes varying between -2 bps (2-yr) and +0.6 bps (30-yr). 10-yr yield spread changes vs Germany widen by up to 2 bps. Sterling traders took at a day off after yesterday’s GBP rally on the faintest of Brexit hopes. EUR/GBP changes hands around 0.9050.

News Headlines:

The Chinese Ministry of Finance announced that it will apply additional tariffs of between 5% and 10% of $75bn of US imports. Tariffs will apply on a 1st list of goods from September 1st and on a 2nd list from December 15. The new measures are retaliatory in nature after US President Trump raised levies early August and the US government officially labelled China as an FX manipulator. White House economic advisor Navarro immediately tried to downplay China’s action by saying that the amount of money being tariffed is not material in terms of macro growth.

Voting regional Fed governor Bullard (St. Louis) countered some of his regional colleagues who recently spoke out in favour of holding a wait-and-see approach in September. Bullard even put the idea of a 50 bps rate cut on table. He argues that the Fed should do anything possible to keep the economic expansion going and get the yield curve uninverted.

Belgian business confidence declined for 5th straight month from -5 to -5.8 in August (vs -6 consensus), the lowest level since 2016 and the longest declining stretch since 2011. All subcomponents (manufacturing, construction, business service & trade) fell with surveyed executives also turning a lot more pessimistic about future demand. Belgian consumer confidence, published earlier this week, was also very downbeat.


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