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Illustration: Aïda Amer/Axios
Stocks roared higher on Tuesday after news that some Chinese imports would be spared from a 10% tariff increase the Trump administration plans to impose on Sept. 1, but the bond market was unimpressed and continued to push yields lower, tipping a strong recession indicator.
Why it matters: Bonds have been accurate in predicting Fed policy and U.S. economic indicators all year. Tuesday's market action shows investors believe the damage has already been done to the world economy — and that this temporary respite in the trade war is likely too little, too late.
The big picture: The bond market has consistently priced in the negative impacts of the trade war, triggering recession alarms this year that have been accurate since World War II.
The stock market, on the other hand, has rallied on any good news about the trade war and renewed communication between China and the U.S., which has generally proved fleeting and short-lived.
What they're saying: "Talking is good, but there has been a lot of talk since Trump and Xi met in Buenos Aires last November, and not much progress," Lou Brien, market strategist at DRW Trading, tells Axios in an email.
Catch-up quick: Global economic data has consistently worsened in 2019, with Japan and 3 of Europe's 4 largest economies — Germany, Italy and the U.K. — heading toward recession by year-end, and China growing at its slowest pace in 27 years.
What to watch: The inverted 3-month/10-year yield curve, which most recently touched -35 basis points, and the 2-year/10-year inversion have preceded every recession in the past 70 years.
Bond investors also were unfazed by Tuesday's consumer price index reading, which showed inflation picked up meaningfully in July.
Why it matters: Normally a higher-than-expected inflation report would cause a selloff in Treasuries because inflation erodes the value of already held bonds, especially in longer-dated maturities. But not on Tuesday.
Total U.S. household debt rose to $13.86 trillion in the second quarter, the 20th consecutive quarter with an increase. Total household debt — fueled by mortgages — is now $1.2 trillion higher, in nominal terms, than its previous peak, touched in 2008, the New York Fed reported Tuesday.
Axios' Courtenay Brown reports: The Trump administration's list of goods from China that won't be subject to a 10% tariff until Dec. 15 is made up of "products where 75% or more of the 2018 U.S. imports of that product were from China," according to an email sent to trade groups from the U.S. Trade Representative Office.
Between the lines: The Chinese Ministry of Commerce said that U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and China's Vice Premier Liu He spoke on Tuesday and that the parties would commence trade talks within the next 2 weeks.
Speaking to reporters, Trump said the tariff move was an attempt to provide some relief for retailers — and ultimately consumers, who could face higher prices if the additional costs from tariffs are passed on.