NEW YORK (BLOOMBERG) - Kim Forrest started worrying as soon as Jerome Powell said trade tensions had cooled to a "simmer." While not claiming to know what the president thinks, she sensed the market was bracing for a response.
Something from Donald Trump that would remind the Federal Reserve chairman that it's no time to get complacent about rates.
"The market was holding the 'simmering' comment in its head," said Forrest, chief investment officer at Bokeh Capital Management, in Pittsburgh. Powell's calm tone and reluctance to commit to more cuts just seemed like too much temptation for Trump to re-escalate his tariff campaign.
Of course, nobody knows if that happened. But escalate it Trump did, sending stocks to a fourth straight losing session on Thursday (Aug 1), including the worst two-day decline for the S&P 500 since mid-May. An early rebound from Wednesday's Fed-related tumble evaporated after Trump said America will levy a 10 per cent tariff on US$300 billion in Chinese goods starting Sept 1.
"The heat has been turned up," Forrest said. "When does it get to a boil?"
Maybe none of it's related. But traders were having a hard time swallowing that. Instead, they fixated on a timeline in which Powell seems to suggest cooling trade tensions reduced the need for future rate reductions - and a day later Trump revs the tensions back up. It fits the pattern of a president bent on getting the central bank to submit, many thought.
"Powell was very careful to say that he was looking at three things, one of which was global growth and the extent to which that is risked by trade tensions," said Ellen Hazen, senior vice president and portfolio manager for F L Putnam, which has US$2.2 billion under management. "It's very logical to conclude that if trade tensions increase, given what Powell said, that would be something he would look at to evaluate a further cut."
Whatever the truth, the result has been the shattering of calm in markets that had until this week been skating fairly placidly. It had been two months since the S&P 500 fell more than 1 per cent, a streak that ended on Wednesday. The Cboe Volatility Index jumped from around 12 to almost 18 in four sessions.
All of it made for a brutal 48 hours for investors who had hoped to celebrate the Fed's first easing since 2008. No such party materialized on Wednesday, when Powell described the move as a "mid-cycle adjustment," interpreted as meaning a small one. While Thursday started better, shares quickly suffered the worst reversal of the year after Trump launched his tariff salvo.
"I don't think it's a coincidence the announcement came today after the rate cut yesterday," said Federated Investors fund manager Steve Chiavarone - who, by the way, sees it as a brilliant ploy. "It's possible that while most folks were playing checkers, the president was playing three-dimensional chess here. And if he is, kudos to him."
Powell's refusal to commit to a full-blown rate cycle wasn't sitting well with bulls to begin with. Many had been hoping for a half-point cut on Wednesday and were sorry to get only a quarter. They were happy when the market bounced back Thursday, seemingly on its own volition. Happy but worried.
"That 'mid-cycle' comment wasn't what Trump wanted, so yes, I did expect something like this to happen," said Yousef Abbasi, director of US institutional equities and global market strategist at INTL FCStone. "Powell has a very thankless job because of Trump. Jay Powell and Trump: it's like having a very demanding parent that sees everything you do as wrong."
Matt Maley, an equity strategist at Miller Tabak + Co., had been worried for a while that the July 31 Fed meeting would complicate his plans to go on vacation next week. While the meeting itself didn't change his plans, he said, its consequences may have.
"Now I am like, 'OK, I see now, how it affected Trump and he affected the markets,"' Maley said. "I thought it would be a quiet vacation. Now I'll be logging in to see what's going on."