Trump Tweets Jump Start Rate-Cut Bets, Unraveling Powell Efforts

(Bloomberg) -- Even if it's just bluster amid trade talks, President Donald Trump's threat to escalate tariffs on China was enough to undo some of Federal Reserve Chairman Jerome Powell's success in pulling traders back from betting on interest-rate cuts.

Trump's tweets on Sunday have sent risk assets reeling. They also led traders to weigh the potential for heightened trade tension against Powell's message last week that the forces depressing inflation would prove “transitory” and so less of a driver of expectations for easier policy. Money-market traders now see a full quarter-point cut priced in for April 2020, whereas at the end of last week that timing had been pushed out to the middle of next year.

Ben Emons of Medley Global Advisors and other analysts say that the key is the combination of weaker equities against a backdrop of a stronger dollar: This is tightening financial conditions, which if sustained could revive bets that a rate reduction could come sooner.

“A persistent tightening of financial conditions will only support the argument for a preemptive Fed cut,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA.

The yield on benchmark 10-year Treasuries tumbled to 2.48 percent, its lowest since the start of the month. The dollar rose against almost all of its G-10 peers, and the S&P 500 index was down about 1 percent as the VIX gauge of stock volatility surged.

The Bloomberg U.S. Financial Conditions Index, a barometer of health in financial markets, fell Monday to its lowest since early April -- with a lower number reflecting tighter conditions and increased stress.

The index at the end of last week was approaching its highest levels this year, after Powell following the Fed's meeting said inflation will rebound and the economy will stay healthy without fresh help from the central bank.

“Trump's tweets are likely some negotiation posturing,” said Peter Tchir, head of macro strategy at Academy Securities, on Bloomberg television. “But the likelihood of no deal has increased.” His expectation is that the Fed won't cut rates in 2019.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Elizabeth Stanton

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