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Global Central Banks Insist They Have a Winning Strategy

Risk assets continue to be held hostage to the latest developments on the U.S.-China trade front. Stocks began last week trading lower but soon turned around following Wednesday’s announcement that the two sides would meet in Washington in October. The subsequent rally took the index to its highest level since the start of August, and to within 1.5 percent of its record high. The yield on Treasury securities traced a similar pattern. After closing the previous week at 1.50 percent, the ten-year note traded as low as 1.43, before rising with the trade news to end the week at 1.56 percent. The two-year note also rose to 1.56 percent from its prior week’s close of 1.51. 

Why the Fed is in a No-Win Situation

The latest round of U.S. tariffs on Chinese imports took effect on Sunday as scheduled. There was no last-minute change of heart by the administration, as some had hoped. The tariffs amount to 15 percent on roughly $110 billion of mostly consumer goods and are in addition to the previously levied 25 percent tariff on approximately $250 billion of mostly intermediate goods, which levy is scheduled to rise to 30 percent in October. On Dec. 15, another approximately $150 billion of mostly consumer goods imports are scheduled to be tariffed at the 15 percent level. Additional tariffs on U.S. exports to China also took effect on Sunday. 

To What Extent Can Policy Changes Impact Slowing Economic Growth?

Fear of a worsening global economic slowdown dragged bond yields sharply lower last week. The yield on the ten-year Treasury note plunged 20 basis points to 1.55 percent (a basis point is 1/100th of a percent), briefly causing an inversion of the yield curve between the two and ten-year maturities. Since the administration’s Aug. 1 announcement of another possible round of 10 percent tariffs on Chinese imports, the yield has collapsed by an extraordinary 46 basis points. Also last week, the yield on the thirty-year bond fell to an all-time low of 1.97 percent, down from 2.53 percent at the beginning of the month.

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