Making Sense of China Talks, Fed Meeting, Mag 7 Moves
Why did Trump just rate talks with Xi as a '12' out of 10, what did Powell's hawkish rate cut just do to the market, and the latest for Microsoft, Meta and Google.
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The much-anticipated meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping has at last come and gone. This was the first in-person meeting between the two leaders in six years. It more or less, and in the news cycle, completely overshadowed an Federal Open Market Committee policy meeting on Wednesday afternoon. The bottom-line? The trade truce between the two largest economies on the planet has been extended.
The give and take? Pres. Trump appears to have cut fentanyl-linked tariffs in half to 10%, while also agreeing to a one-year delay in the implementation of a sanctions-focused framework, known as the 50% rule that would have dramatically increased the sheer number of Chinese companies subject to much higher duties. This drops the overall levy on most Chinese exports to the U.S. from 57% to 47%. In return, China has agreed to halt for one year, the export controls announced for rare earth metals and minerals. China has also agreed to suspend countermeasures against U.S. maritime vessels.
During the 90-minute get-together in South Korea, both sides agreed to work to reduce the trade of illicit fentanyl, work to resolve remaining issues around the Tik Tok social media platform and significantly increase the trade of agricultural products between the two nations that would include large sales of soybeans from U.S. farmers to Chinese customers. Apparently, semiconductors were discussed, but not chips designed on Nvidia's (NVDA) Blackwell architecture specifically. The autonomous island nation / province of Taiwan was surprisingly not discussed.
President Trump
Speaking from Air Force One...
"Overall, I guess on the scale of from zero to 10, with 10 being the best, I would say the meeting was a 12.” The president added, “Tremendous amounts of the soybeans and other farm products are going to be purchased immediately.”
From Truth Social...
"I was extremely honored by the fact that President Xi authorized China to begin the purchase of massive amounts of Soybeans, Sorghum, and other Farm products. Our Farmers will be very happy! In fact, as I said once before during my first Administration, Farmers should immediately go out and buy more land and larger tractors. I would like to thank President Xi for this! Additionally, China has agreed to continue the flow of Rare Earth, Critical Minerals, Magnets, etc., openly and freely. Very significantly, China has strongly stated that they will work diligently with us to stop the flow of Fentanyl into our Country. "
"China also agreed that they will begin the process of purchasing American Energy. In fact, a very large scale transaction may take place concerning the purchase of Oil and Gas from the Great State of Alaska."
Counterpoint
In a readout published at Xinhua News Agency, Chinese leader Xi Jinping said, "China and the United States can jointly demonstrate the responsibility befitting of major powers, working together to accomplish more significant, practical and beneficial undertakings for both nations and for the world."
According to Kelly Ng at the BBC, "The Chinese leader said both sides had reached a consensus to resolve 'major trade issues'. The Chinese and US teams will be working on delivering outcomes that will serve as a 'reassuring pill' for both countries' economies. He pointed out that both countries have "promising prospects" for cooperation in areas such as handling illegal immigrants, cyber fraud, money laundering and artificial intelligence."
The Fed
We all know by now that the FOMC decided to cut the target range for the fed funds rate by a quarter percentage point to 3.75% - 4%. That was fully anticipated and fully priced in by financial markets. The official statement made a point of publicly informing readers that they have less "available" indicators to work with and that while unemployment had "edged up," it had remained low "through August." We also all know that Fed Gov. Stephen Miran dissented in favor of a half percentage-point cut while Kansas City Fed Pres. Jeffrey Schmid dissented in favor of no rate cut at all. Keep in mind that Miran's spot has permanent voting rights while KC loses the right to vote on policy in 2026.
The real news came later on in the statement and in the press conference. Most importantly, from the statement, we see... "The Committee decided to conclude the reduction of its aggregate securities holdings on Dec. 1." This matters as the goal of "quantitative tightening" had been to reach the minimal level of liquidity necessary to be able to implement policy decisions both effectively and efficiently. This has to be done while ensuring that banks have ample cash reserves on hand.
During the later part of the "QT era," which began in 2022, private sector banks have been buying U.S. sovereign and mortgage-backed debt securities. This has cut the level of cash that these banks have had available to park overnight at the Fed. That, in turn, leaves less liquidity in the system and could allow for short-term rates to spike on any given day, even with an obvious news-related catalyst.
Hence, the Fed was put in a position, where regardless of policy intent, there was a need to put a halt, at least for now, to the draining of liquidity from the banking system. Putting a halt to quantitative tightening also permits the Fed to slide back into "quantitative easing" mode should a financial crisis arise in the future and should the artificial depression of interest rates, and rapid expansion of both the money supply and the monetary base be seen as part of any solution.
The Press Conference
During the press conference, Fed Chair Jerome Powell made this rate cut one of the most hawkish-looking rate cuts I can remember, even if quantitative tightening is coming to a rapid end. I think my colleagues here at TheStreet Pro wrote it best in real time, as Powell single-handedly wiped out most of Wednesday's market rally, so I won't try to be clever and reword anything they already covered so well.
First Chris Versace wrote:
"The reason for the market reversal stems from the comment that Federal Reserve Chair Jerome Powell made as he concluded his prepared remarks: 'a December rate cut is not a foregone conclusion, far from it.' The addition of “far from it” was a new development and it speaks to the Fed continuing to be data dependent when it comes to its policy decisions. It also emphasizes that the Fed is balancing elevated inflation pressures with the softer jobs market and recent layoff headlines we've been reading about."
Then, in his market wrap-up, James "Rev Shark" DePorre wrote:
"After the Federal Reserve announced a quarter-point rate cut on Wednesday afternoon, Jerome Powell caught the market by surprise when he stated that 'there are strongly differing views at today's meeting about how to proceed in December. A further reduction in (the) policy rate in December is not a foregone conclusion, far from it.' Investors were not expecting that comment, and it triggered a sharp drop in December Fed Fund futures. The odds of a December cut were 96% a week ago and dropped to 66% following Powell's comment."
Fed Funds Futures
Those three words above, ladies and gentlemen, are exactly why trading businesses created the high-speed, high-frequency, keyword-reading algorithms that ultimately replaced human traders on Wall Street. Forced momentum and price overshoot is basically what has become of the old process for price discovery. It is a perversion of the purity of the marketplace, sort of like what the designated hitter is to baseball, but that doesn't stop us from watching baseball. So, we play the game on the field provided. We adapt.
According to Fed Funds Futures markets this morning, that probability for a December rate cut that Rev referred to has already moved back up to 73%. There is now a 59% likelihood priced in for another quarter-percentage point rate cut after December in April and a 75% probability priced in for a total of a half point worth of rate cuts for all of calendar year 2026.
Between the Bells...
- Alphabet (GOOGL) is trading higher as it delivered its first $100 billion revenue quarter and Gemini hit the 650 million monthly active user level.
- Microsoft (MSFT) is trading lower as its investment in OpenAI weighs on the shares.
- Meta Platforms (META) is being taken to the woodshed as it recorded a one-time tax charge of almost $16 billion,while increasing guidance for total expenses.
- ServiceNow (NOW) is trading higher as it increased subscription revenue guidance and announced a 5-for-1 stock split.
- Chipotle Mexican Grill (CMG) is absolutely getting smoked as the firm cut guidance for full year comp sales from flat to negative on a year-over-year basis.
Economics
(All Times Eastern)
10:30 - Natural Gas Inventories (Weekly): Last +87B cf.
The Fed
(All Times Eastern)
09:55 - Speaker: Reserve Board Gov. Michelle Bowman.
1:15 p.m. - Speaker: Dallas Fed Pres. Lorie Logan.
Today's Earnings Highlights
(Consensus EPS Expectations)
Before the Open: (MO) (1.45), (BUD) (.96), (BIIB) (3.88), (LLY) (5.92), (EL) (.17), (HSY) (1.07), (LHX) (2.56), (MA) (4.31), (MRK) (2.35)
After the Close: (AMZN) (1.56), (AAPL) (1.77), GDDY (2.09), (RDDT) (1.05), (TWLO) (1.07), (WDC) (1.59)
At the time of publication, Guilfoyle was long NVDA, GOOGL, MSFT equity.
