Stocks gapped down at the open this morning. The Dow is currently down 350 pts and the SPX is down 1.5%. Nearly every sector of the market is down more than 1%, led by energy and tech (-2%). Domestically oriented stocks like healthcare insurance, real estate and utilities are holding steady. But companies exposed to the trade war are getting hit. A lot of this is headline driven (see below). The VIX Index spiked to 17.5. Commodities are falling in value, save gold (+1.5%). WTI crude oil is down 3% to $53.60/barrel. Bonds are sopping up the negativity and benefiting from it. The 10-year Treasury Note yield fell back to 1.55% and the iShares 20+ Year Treasury Bond ETF (TLT) is up nearly .9% this morning. The often cited “yield curve” difference between the 2-year and 10-year Treasury yields is still barely positive. This is a technical indicator bond traders watch in order to gauge the chances of an economic recession within the next year or two.

China announced retaliatory trade tariffs on $75bil worth of goods imported from the US. This comes in response to President Trump’s latest round of threatened tariffs (10% on the as yet untaxed $300bil of goods China exports to the US), which are expected to go into effect next month. China’s State Council will set new tariffs of 5% to 25% on US autos, auto parts, agricultural products, and crude oil. In response, President Trump ordered US companies to look for alternatives to China (i.e. other sources of manufacturing, supply chain, etc.).

Meanwhile, Fed Chairman Jerome Powell reiterated his intent to use monetary policy to support the economy. He pledged that the Fed “will act as appropriate to sustain the expansion.” Typically, the Fed focuses primarily on keeping inflation in check and supporting full employment. But Mr. Powell justified his more broad view of the Fed’s responsibility noting that the “economy is close to both goals.” So in this way, the Fed is essentially trying to soften the negative economic impact of the Trump Administration’s trade war. When asked exactly how the Fed would do this he said, “there is no settled rulebook for [responding to an] international trade [war].” Immediately afterward, President Trump sent out a bizarre Tweet calling Mr. Powell “our enemy.” Nothing about this situation seems congruent with the past. Just like the Fed’s aggressive quantitative easing program coming out of the Financial Crisis, much of what we see with monetary policy these days—and the president’s involvement—seems unprecedented.

The US economy actually seems to have improved over the last couple of months. CNBC says its survey of economists suggests US GDP (economic growth) will rise 2.1% this quarter. Citigroup’s US Economic Surprise Index clawed its way back to -14 from -70 at the end of June. This means economic data are no longer falling short of economists’ expectations. Retail sales accelerated to a 3.4% y/y clip. Existing home sales are now slightly higher than they were a year ago (compared with a 5% drop last March). Regional business activity surveys in New York and Philadelphia show continued expansion. So the story isn’t nearly as negative as the bond market’s sharp gains would suggest.

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