U.S. interest rates. The U.S. Federal Reserve lowered its benchmark interest rate from 2.5 percent to 2.25 percent on Wednesday, its first rate cut in more than a decade. Fed Chairman Jerome Powell tried to make clear that this is not the first of a series of cuts, though he later clarified that it’s not necessarily a one-off move, either. Notably, the spread between yields on three-month and 10-year U.S. Treasury bonds – a closely monitored indicator of a looming recession – slid deeper into negative territory to minus 5.5 basis points on Wednesday. The U.S. did see some good economic news, though, with the private sector adding 156,000 new jobs in July, according to private payroll firm ADP. The Fed’s move has kick-started something of a race to the bottom globally, with Brazil and several Gulf countries announcing their own rate cuts after India and others decreased rates in anticipation of the move. Japan, the European Central Bank and others have signaled plans to eventually follow suit. (China is standing pat.) All told, the global stockpile of debt with sub-zero yields surged to more than $14 trillion for the first time in history, according to Bloomberg data, surpassing 25 percent of the entire investment-grade market.
U.S.-China trade talks. The U.S. and Chinese trade chiefs finally got back to the negotiating table on Tuesday in Shanghai. Working-level discussions will continue in August, according to Chinese state media, but the senior delegations are not expected to meet in person again until September. At this point, there’s just not enough urgency for a deal on either side to compel them to make major concessions. And both sides appear to be betting that their hands will strengthen the longer the dispute drags on. The U.S. thinks China’s internal structural pressures will eventually force Beijing to cave – and that it will be easy enough to quickly ink (and sell to the U.S. public) a watered-down deal if a sudden U.S. economic downturn forces its hand. China thinks the Trump administration won’t want to carry the economic pain from the trade war deep into election season, and that it has stabilized the Chinese economy enough by easing off some of its painful structural reforms to hold out. At minimum, Beijing is hoping to keep the U.S. from fully following through with its ban on critical tech exports to Chinese firms like Huawei for as long as possible, allowing Chinese tech firms to stockpile critical components in the meantime.
Ships in the night. A Chinese warship collided with a Taiwanese freighter in an established shipping lane in the Taiwan Strait on Wednesday night, damaging the bulk carrier, according to the Taiwanese coast guard. The incident happened as both China and Taiwan were holding separate live-fire exercises in the Taiwan Strait. As the South and East China seas become increasingly crowded with warships and coast guard vessels, and as China and other countries increasingly turn to commercial vessels to support their maritime claims, the frequency of these sorts of incidents (whether intentional or accidental) is bound to increase, requiring adroit diplomacy from regional states and the U.S. to prevent escalations. This concern appears to be driving some progress at this week’s summit of foreign ministers from the Association of Southeast Asian Nations, which was attended by Chinese Foreign Minister Wang Yi and U.S. Secretary of State Mike Pompeo. China and ASEAN released a long-elusive draft of a non-binding maritime code of conduct, for example. This won’t resolve the underlying tensions in the region; the 2002 Declaration on the Conduct of Parties in the South China Sea certainly hasn’t deterred Chinese assertiveness. But, at minimum, the code of conduct may support implementation of mechanisms for handling unplanned encounters at sea.
Chinese warnings. In a speech on Wednesday, the commander of the People’s Liberation Army garrison in Hong Kong, Maj. Gen. Chen Daoxiang, called violent protests in the restive special administrative region “absolutely impermissible” and warned that the army will protect Chinese sovereignty. Late on Wednesday, the PLA released a pair of videos (with English subtitles, which is unusual for PLA propaganda) of the army’s anti-riot drills simulating a crackdown on protesters with armored vehicles, tear gas and water cannons. This comes two days after a senior Trump administration official told Bloomberg that the White House was monitoring a buildup of Chinese military or armed police at the Hong Kong border. According to Chinese state media, a drill involving some 190,000 police officers, armored vehicles and helicopters took place in nearby Guangdong on Tuesday, ostensibly in preparation for festivities marking the 70th anniversary of the founding of the People’s Republic – events that typically take place only in Beijing. We still think Beijing has far more to lose than gain over the long term by siccing the PLA on the protesters in Hong Kong – and that the Hong Kong government will ultimately be able to manage the unrest. But with the frequency of low-level violence waged against and by protesters increasing, we might have to consider the unexpected.
Brexit preparations. The U.K. government tripled-down on its commitment to leave the European Union on Oct. 31, deal or no deal – or at least it’s trying to give that impression. Finance Minister Sajid Javid announced that London would commit another 2.1 billion pounds ($2.5 billion) to no-deal preparations, on top of the 4.2 billion pounds it has dedicated to the effort since 2016. The U.K. is also reportedly considering taking out newspaper and online ads on the Continent, partly to deliver information to British citizens living there but also to try to convince the rest of the EU that it isn’t bluffing. So far, Brussels and European governments have given no indication that they’re worried – but businesses on both sides of the English Channel sure are. The latest sign: The final July readings for IHS Markit’s Purchasing Managers’ Index revealed that the British manufacturing sector is “suffocating” – the output component of the PMI hit its lowest level since July 2012 – and the eurozone manufacturing PMI recorded its sixth consecutive month of contraction. One problem with the U.K.’s message to the EU, however, is that it is frequently undermined at home, most recently with a Daily Telegraph article in which the deputy leader of the pro-Brexit faction in the Conservative Party said around 60 Tory lawmakers would vote against the EU withdrawal agreement even if the controversial Irish backstop were removed. Between intransigence on both sides and a tight deadline, there can be little doubt that the withdrawal agreement will not be passed by Halloween. The question – one a full-page ad in Le Monde won’t answer – is what the U.K. intends to do about it.
Russia’s new internet. The Russian Ministry of Defense has tested its military internet that will be used to transfer encrypted data for automated and combat control systems. During the test, encrypted signals that included heavy audio and video files were sent across 2,000 kilometers (1,200 miles) at a speed of 300 megabits per second. The network is completely autonomous and has no connectivity to the worldwide web. Over 4,500 troops in Russia’s Central Military District took part in the test.
- On Thursday, Russia launched its Ocean Shield 2019 military drills in the Baltic Sea, in which some 70 combat ships and support vessels, 58 aircraft and almost 11,000 soldiers are taking part.
- During telephone talks, U.S. President Donald Trump offered to help Russian President Vladimir Putin with wildfires in Siberia.
- Switzerland’s president said an agreement on a partnership treaty with the European Union was unlikely anytime soon. In the month since the bloc cut off EU-based investors from trading on Swiss bourses, Swiss stock volumes have soared.
- The U.S. Senate Foreign Relations Committee passed a bill to sanction companies that lay underwater pipelines or facilitate the construction of the Nord Stream 2 gas pipeline from Russia to Germany (as well as the already completed TurkStream pipeline to Turkey). The bill still needs congressional and presidential approval, which may not come until after the project is completed within the next several months.
- U.S. national security adviser John Bolton called for a fivefold increase in Japanese spending on the U.S. military presence in the country.
- Bolton also said North Korea’s latest missile tests did not violate Kim Jong Un’s pledges to Donald Trump.
- U.S.-Chinese investments have hit a five-year low, according to a new report by the Rhodium Group and the National Committee on U.S.-China Relations.
- The U.S. placed sanctions on Iranian Foreign Minister Mohammad Javad Zarif.