Markets Slip Today as Traders Digest Impact of US-China Tariff Deadlock

09/24/2018 2:17 pm EST

Focus: MARKETS

Nell Sloane

Principal, Capital Trading Group

Stocks are slightly lower Monday morning, but continue trading near all-time record highs. Keep in mind, fresh new U.S. tariffs on $200 billion worth of Chinese imports officially go into play today, writes Nell Sloane Monday.

Also, over the weekend, Chinese officials announced they were backing out of recently scheduled talks with U.S. negotiators.

The fear now is that President Trump could unleash an additional $267 billion in tariffs against the Chinese and that we are taking further steps towards a longer-term deadlock. To this point, Wall Street has been shrugging off headlines surrounding trade tensions.

Reuters: Wall Street drops on trade worries Monday and Rosenstein news.

 A longer-term slowdown in global growth will eventually start to be questioned. Also, of importance this week will be the two-day Fed meeting scheduled for Tuesday and Wednesday. From what I understand, Fed Chair Jay Powell is expected to hold a press conference on Wednesday afternoon at around 2:30 pm EDT, after the meeting wraps up. Most are looking for the Fed to make their third rate hike of 2018 and provide somewhat hawkish commentary that keeps the trade looking for another rate hike in December.

It’s worth noting, since the beginning of the current U.S. Fed rate hike cycle, which began December 2015, the markets tend to sell off following a rate hike. From what I understand, the S&P 500 (SPX) has dropped by an average of -0.75% the week following a rate hike announcement, trading negatively 71% of the time.

Looking ahead to 2019, the Fed is currently expected to raise rates three times. There’s a lot of debate about 2019. Doves want to argue that could easily slip to just two rate hikes or perhaps as few as one rate hike if Fed members cite increased trade risks associated with tariffs.

On the flip side, those who are more hawkish fear we could see another four rate hikes in 2019 as a tightening labor market pushes wage growth and inflation higher than forecast.

Both doves and hawks seem to have very valid arguments and concerns. There’s still nothing new on NAFTA. I continue to look for something to break lose following the upcoming Quebec elections on October 1.

As for traditional economic new, there is plenty to digest this week: The obvious big-ticket item will be the Fed policy decision and press conference following on Wednesday. Also on Wednesday we have New Home Sales and Durable Goods data.

Thursday is the revised estimate of Q2 GDP, International Trade and Jobless claims.

There are many moving parts this week. It will be interesting to see if media headlines and noise make more of an impact on stocks. It just feels like the news flow is really starting to heat up in regards deteriorating U.S. and Chinese relations. 

Cheers,

Nell

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