“Insurance”, to ensure that growth does not splutter mid-cycle: that’s how Fed chair Jerome Powell summed up the 25bp rate cut that he had just announced last Wednesday, pouring cold water on hopes among investors that this would mark the start of a new rate-cutting cycle.

Donald Trump, probably unhappy with the minor rate cut, triggered a renewed wave of stress on Thursday by tweeting that he plans to extend customs duties to virtually all types of Chinese imports from 1 September. A US trade delegation had recently been to China to resume negotiations. The tweet sent a shockwave through equity markets, propelling European indices lower by more than 3% over the week. It also sent investors stampeding into government bonds, as reflected by a -0.9% yield on the 10-year Swiss government bond, as well as into gold and other haven assets such as the Swiss franc and the yen.

Existing duties target manufactured and semi-finished goods. The announced 10% tax will be levied on electronic goods, home appliances and textiles – products for which it is hard to find alternatives to the one you want. The potential hit to retail prices could dampen household consumption, which could in turn slow growth in the US economy.

As a payback, Beijing has reportedly called on publicly owned companies to stop buying agricultural goods from the US. Expect some extra budgetary support as well. The yuan has been falling steadily, reaching its lowest level since 2008 northwards of CNY 7 to the dollar. We suspect some deliberate action from Beijing in support of its exports, as a cheaper currency will offset the higher customs duties. In turn, this will place more pressure on US companies – and companies everywhere – by enhancing the appeal of goods that are ‘made in China’. In contrast, Chinese companies that have geared up in dollars will take a hit.

So the Fed is under pressure to do more rate cuts. But there is only so low it go to offset the damage from customs duties, because the US is not in recession. The job market is still in fine form. Latest additions were in line with estimates, at 165,000, with the rate of unemployment clocking in at 3.7%.

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