Economy is flying blind and an additional 100% tariff on China?
Summary
- The stock market posted gains earlier in the week but turned sharply lower on Friday after President Trump’s new tariff threats against China triggered a sharp decline.
- The S&P 500 fell 2.7% on Friday, marking its largest single-day drop since April, and ended the week down 2.4%. Despite the decline, the index still has a year-to-date gain of 12.5%.
- The 10-year U.S. Treasury yield dropped 13 basis points to 4.05%, most of the decline occurring on Friday.
- Later on Friday, Trump announced plans to implement an additional 100% tariff and introduce new export controls on critical software products.
Shutdown continues
Last week, the government shutdown entered its second week. Delays in economic data like the monthly jobs report will force the Fed to rely on alternative data if the shutdown persists. The Bureau of Labor Statistics (BLS) is calling some employees back from furlough to work on the Consumer Price Index (CPI) report, originally scheduled for release on October 15. The BLS has now indicated the report will be published on Friday, October 24. While the CPI is widely used, the impetus for recalling workers was likely the upcoming annual social security cost of living adjustment (COLA).
Approximately 750,000 federal workers have been furloughed, while many others continue to work without pay in “essential” roles. Some essential workers, including TSA agents, have reportedly used sick leave as protest. In a highly unusual step, President Trump began “reductions in force” (permanent layoffs) of some federal employees this week, aiming to shrink the government during the shutdown.
October FOMC meeting
Should the shutdown conclude by mid-month, the FOMC is expected to have sufficient time to review the September labor and CPI reports, as well as any additional releases, ahead of its meeting on October 28-29. Markets are currently pricing in a 98% chance of a 25 bps cut.
The FOMC minutes showed most participants supported September’s rate cut, citing rising employment risks and stable or lower inflation risks. The committee noted that downside risks to employment had increased and upside risk had diminished, hinting at possible further cuts. However, ongoing inflation concerns are limiting more aggressive easing for now.
The week ahead
Earnings season continues next week, with investors closely monitoring reports for indications of economic growth, as well as the effects of inflation passthrough.
The upcoming military pay date on October 15 may prompt a compromise to end the government shutdown, as 1.3 million active-duty troops and hundreds of thousands of National Guard and Reserve members await their semi-monthly checks.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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SONIA
SONIA is the Sterling Overnight Index Average. It is published each London business day by the Bank of England and measures the cost of overnight, unsecured borrowing. Daily SONIA fixings are compounded to calculate an overall floating rate for an interest period. Compounded SONIA fixings provided by Chatham reflect the backward-looking rate for the designated tenors.
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Disclaimers
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