Last week, Federal Reserve Chairman Powell cut U.S. interest rates calling the move an insurance policy against the effects of “simmering” trade tensions, may need to buy more coverage after the United States late Monday designated China a currency manipulator.
The move by US Treasury Secretary Steven Mnuchin starts a formal process to address what the United States says is the “unfair competitive advantage” in trade that China gets with a cheaper RMB Yuan.
Stock futures dropped and Treasury futures rose as traders bet this latest escalation of the US-China trade dispute will slow the US economy further, forcing the Fed to respond with deeper rate cuts to ease financial conditions and encourage businesses to hire and spend.
If last week’s rate cut was the FOMC’s way of insuring against a possible fire, then the potential for that fire is up, and that potential is something the policymakers are going to react to.
Interest rate futures now show traders see a nearly 40% chance the Fed will lower borrowing costs by a 1/2 a bpt next month, up from less than 2% on Friday and 30% earlier Monday.
There is nothing Wall Street like more that cheap money, and the S&P 500 futures are reflecting that already.