The government shutdown entered its 31st day on Friday, and if it extends past November 3rd, will become the longest in U.S. history (Chart 1). At the time of writing, there is no offramp to end the shutdown. On Tuesday, Senate Democrats rejected (for the thirteenth time) a House-passed stopgap measure to fund the government through November 21st, while Senator Thune pushed back on the idea that Republicans were considering piecemeal bills that would reopen portions of the government. Elsewhere, President Trump traveled to Asia this week, which culminated in three new trade agreements and a further easing in trade tensions with China. Stateside, the Federal Reserve delivered another rate cut and signaled an end to its quantitative tightening program. Powell’s remarks that a December rate cut “is not a foregone conclusion” led to some firming in Treasury yields, as market pricing for a December cut fell to 70%. A healthy slate of earnings reports capped off the week, pushing the S&P 500 up 1.0%. 

In a further move to de-escalate trade tensions with China, President Trump agreed to cut the fentanyl tariffs from 20% to 10%, suspend the increase of its reciprocal tariffs (scheduled to rise from 10% to 35% on November 10th) and ease restrictions on blacklisted Chinese firms. In return, China eased its restrictions on rare earth exports and said it would increase purchases of U.S. soybeans. Both countries also agreed to suspend their port fees, which came into effect earlier this month. 

The U.S. also reached trade agreements with three other counties this week, including Thailand, Malaysia and Cambodia. Trade to these countries account for roughly 3% of total U.S. annual imports, but combined with the other seven agreements, 30% of U.S. trade is now covered by a new trade deal (Chart 2). Details of this week’s agreements remain vague, but based on White House fact sheets, each country will face a 19% reciprocal tariff rate and have agreed to reduce tariffs and trade barriers on U.S. imports along with making commitments to purchase energy products and aircrafts. 

The Federal Reserve’s move to cut its benchmark rate by another 25 basis points – bringing the target range to 3.75-4.0% – came as little surprise. However, Powell’s remarks in the press conference regarding a December rate cut being far from guaranteed offered a shot in the arm to market odds, which had another cut as a near certainty. Indeed, the statement showed a growing divide among FOMC members. Recently appointed Stephen Miran dissented in favor of larger (50bps) cut, while Jeffery Schmid voted to hold rates steady. Given the data fog created by the government shutdown, Powell noted that there was a “growing chorus to at least wait a cycle” before making another cut, particularly given today’s policy rate is at the upper end of some estimates of neutral. We interpret Powell’s hawkish tone as a way of bringing more balance into market expectations. Another cut in December remains our base case, but we acknowledge that a flurry of data releases once government reopens could quickly shift views on the economic outlook and reshape the Fed’s thinking on its policy adjustment.