Earlier this week US President Donald Trump further raised the ante with China. He even threatened “massive” tariff increases on all the country’s imports, the clearest indication yet of an explosive escalation in trade hostilities. This stance comes in response to ongoing disputes over China’s control of rare-earth metals, critical resources used in various technologies. In fact, after Trump made these statements, stock markets took a nosedive, hitting especially hard technology stocks that are most dependent on trade with China.
That’s why on Wednesday, Trump went to Truth Social to air his grievances. He made the outrageous assertion that China was holding the world “hostage” with its rare earth monopoly. He even threatened a Chinese withdrawal from compliance altogether. If China does not come to the bargaining table, then he will act and penalize China economically. This bellicose posturing has sparked worries in the investor community, resulting in a significant drop in overall market indices.
The shock caused the Dow Jones Industrial Average to take a quick plunge, falling 492 points. In comparison, the S&P 500 and Nasdaq Composite were down 1.5%. Relatedly, the market has been very sensitive to trade-war escalation. This is particularly pronounced in industries most vulnerable to Chinese supply chains.
In addition to the stock market’s fluctuation, the University of Michigan’s consumer sentiment index indicated stability despite economic uncertainties. In October, the index was relatively flat. That theoretical index was apparently countered by a boost in the present conditions index, which rose to 61.0 — a 1% gain over July. The survey’s expectations reading dropped to 51.2, a 1% decrease, indicating increasing worry about what’s in store for the economy.
Joanne Hsu, the director of the University of Michigan Surveys of Consumers, noted that “pocketbook issues like high prices and weakening job prospects remain at the forefront of consumers’ minds.” She added that interviews have shown little evidence that the ongoing federal government shutdown has altered consumer perceptions of the economy thus far.
Federal Reserve Governor Christopher Waller commented on the current economic landscape, emphasizing the need for caution as conflicting signals emerge. He stated, “Something’s got to give. Either the labor market rebounds to match the GDP growth, or that GDP growth is going to pull back. So whichever way that goes, it’s got to affect what you do with policy.” Waller had made clear his preference to see interest rates drop. He urged members not to jump prematurely into making decisions that could lead to more grievous errors.
Treasury Secretary Scott Bessent has made a move. President Trump has whittled down his list of potential Federal Reserve chair replacements from eleven prospective nominees down to five. We assume that Vice Chair for Supervision Michelle Bowman and National Economic Council Director Kevin Hassett are the other two candidates still under consideration.