8/2/2019 1:04:00 PM US stocks fall again in sell-off on tariffs
NEW YORK (AP) — Financial markets around the world buckled Friday, and the S&P 500 was on track for its worst day in months following President Donald Trump’s latest escalation in his trade war with China.
China struck back and said Friday it will take “necessary countermeasures” if Trump follows through on tweets he sent Thursday that shocked markets and promised 10% tariffs on all the Chinese imports that haven’t already been hit with tariffs of 25%.
The re-escalation in tensions between the world’s largest economies has investors worried about a global recession. So they’re playing defense by selling stocks and buying gold. They’re also raising their expectations that the Federal Reserve will be forced to cut interest rates several times to cushion the trade war’s blow.
The S&P 500 was down 1.3%, as of 11 a.m. Eastern time, which would be its biggest loss since May, and was on pace to close out its worst week of the year.
The Dow Jones Industrial Average fell 300 points, or 1.1%, to 26,283, and the Nasdaq was down 1.9%.
The government released its monthly jobs report on Friday, and it’s usually a major, market-moving event. But it hewed close to economists’ expectations, showing a slowdown in hiring last month, and analysts said it was overshadowed by worries about trade and what the Fed could do about it.
The Fed has already cut interest rates once, doing so on Wednesday for the first time in more than a decade. Chairman Jerome Powell cited “trade policy uncertainty” as a major reason for it in a press conference following the announcement. But he stopped short of promising a long cycle of rate cuts, which left investors disappointed and Trump tweeting that “as usual, Powell let us down.”
The next day came Trump’s tweet on tariffs, and investors now say there’s a 98% probability that the Fed will cut rates again at its next meeting in September. That’s up from a roughly 50% probability Wednesday afternoon.
Traders see low rates as steroids for stocks and other risky investments because they make bonds less attractive in comparison. By making borrowing cheaper, low rates can also help goose the economy.
But the Fed has less ammunition than in the past to cut rates because they’re already low following years of nearly zero interest rates to get the economy going. The federal funds rate sits at a range of 2% to 2.25%, compared with the 5.25% perch it sat at before the Great Recession.
Rate cuts alone may not be able to fully counteract all the possible negative repercussions of the trade war. Trade uncertainty has been weighing on business investment spending, and this latest escalation only adds to it. “It will be important to monitor business sentiment surveys to see whether there is a significant impact on the demand for workers — if businesses stop hiring, this would greatly increase the risk of a recession,” UBS Global Wealth Management’s Chief Investment Officer Mark Haefele said in a report.
The latest round of announced tariffs, which would go into effect Sept. 1, more directly affect U.S. consumers shopping at Wal-Mart or Target. If Trump ramps them up to 25% and keeps them there for four to six months, Morgan Stanley economists say they would expect a recession within nine months.
Treasury yields were mixed, and the 10-year yield fell to 1.86% from 1.89% late Thursday. It’s close to its lowest point since Trump’s election in 2016. The two-year yield rose to 1.73% from 1.71%.