FOMC Minutes in view as yields rise

European markets have reversed yesterday’s gains, with the so-called reciprocal tariffs kicking in today. If we thought the figures cooked up by Trump and his team were bad, we now find ourselves facing a trade war with 104% tariffs being places on all Chinese imports. While Trump speculated that China wants to make a deal, we have seen precious few signs that any such conversations are taking place right now. Notably, the Hang Seng managed to reverse the entire 3% decline seen in early trade, closing in the green despite the sharp spike in costs for exports into the US. To some this may be an indication that markets have drawn a line under recent declines, with the whopping 13% collapse seen on Monday clearly a pre-emptive move in anticipation of today’s events.

European losses have been headed up by the DAX, with the German bourse falling over 3% despite indications that the EU have approached the US with a proposal to drop tariffs on industrial goods. Nonetheless, despite the prospect of a trade deal in the near future, markets have to weigh up the possible implications should we see this current state of play maintained for long enough to spark a recession. Ultimately Trump wants concessions, and the EU might have to find a way to bridge the gap in trade between the two countries.

Looking ahead, today sees the latest FOMC minutes, with markets weighing up the likeliness of another four rate cuts this year, as predicted by markets. Ultimately the Fed appear to be taking a much more cautious approach, with market declines rather than economic contraction largely the cause of heightened easing expectations. Interestingly, we have seen the US bond yields push higher over recent days, with China seemingly looking to dump treasuries in a bid to raise US borrowing costs. This makes for tighter financial conditions, undoing much of Donald Trump’s efforts. Despite the Fed’s minutes being lagging in nature, any references to a patient data dependant approach to tariffs from the Fed could further lift US yields.