Trade war trade-off.
There was some good news on trade, last week. The United States took steps to reduce trade friction with the European Union, Canada, Mexico, and Japan.
“The United States on Friday reached an agreement with Canada and Mexico to remove steel and aluminum tariffs, which had been a persistent source of friction across North America over the past year. The deal on metals came as Mr. Trump decided not to press ahead immediately with levies on EU and Japanese automotive products – despite declaring that foreign car and vehicle imports represented a threat to U.S. national security,” reported James Politi, Jude Webber, and Jim Brunsden of Financial Times.
There was some bad news, too. Trade tensions escalated between the United States and China. The United States doubled tariffs on $200 billion of Chinese goods and threatened tariffs on an additional $325 billion of goods. The United States imports about $539 billion worth of goods from China each year, reported the BBC.
In addition, President Trump signed an executive order preventing U.S. companies from using telecommunications equipment made by firms believed to pose a risk to national security. The move is expected to affect the ability of a large Chinese telecoms firm to conduct business in the United States, reported David Lawder and Susan Heavey of Reuters.
China currently has tariffs on $110 billion of American goods and they announced plans to hike tariffs on $60 billion of these goods. In total, China imports $120 billion worth of goods overall from the United States each year.
While the relatively small amount of American goods imported by China would seem to give the United States an advantage in a trade war, China has other means of gaining leverage. The country holds about 7 percent of U.S. debt, which is more than any other nation, reported Jeff Cox of CNBC. If China were to slow purchases of Treasuries, yields on U.S. government bonds may move higher.
A source cited by Reshma Kapadia of Barron’s suggested it is unlikely the Chinese will stop buying Treasuries. “Where would they put the trillions of dollars? Ten-year German Bunds are below Japanese 10-year yields; there aren’t a lot of options…They also don’t want their currency to appreciate, so that handcuffs them…China tends to find things to hurt adversaries without hurting themselves.”
The Standard & Poor’s 500 Index finished the week lower.
Trade talk trouble took a toll last week.
Major U.S. stock indices moved lower when trade talks between the United States and China broke down. The Standard & Poor’s (S&P) 500 Index, Nasdaq Composite, and Dow Jones Industrial Index all finished the week down between 2 percent and 3 percent, reported Ben Levisohn of Barron’s.
Despite the weak weekly performance, the S&P 500 remains up 14.9 percent year-to-date.
The deadline to settle U.S.-China trade issues was Friday. When it passed without any resolution, the U.S. increased tariffs on Chinese goods to 25 percent, reported the BBC.
The economic impact of higher tariffs may be relatively small; however, the impact on business confidence and global markets could be significant, reported Capital Economics.
“We think that the direct effects of President Trump’s threatened tariff hikes could reduce Chinese GDP by up to 0.4 percent and that the associated retaliation would have only a marginal direct impact on the United States. The effects on business confidence and financial markets around the world could be more significant, potentially adding to reasons for renewed policy loosening…In theory, if all else were unchanged, the increase in tariffs would amount to a small fiscal tightening in China and the United States. But both governments have avoided this by spending the proceeds on aid for the most affected parties.”
Bond markets reflected uncertainty, too. The yield curve, which has been flirting with inversion for some time, inverted briefly on Thursday, reported Alex Harris of Bloomberg. A persistent inverted yield curve – featuring a lower yield for 10-year Treasuries than for three-month Treasuries – sometimes signals recession.
David Lynch and Heather Long of The Washington Post reported tariffs imposed on other countries have yet to be removed, including those on steel and aluminum imported from Mexico and Canada.
Trade negotiations between the United States and China are expected to continue.
The Standard & Poor’s 500 Index is off to its best start in 20 years.
Despite the exceptional performance of U.S. stock markets year-to-date, and data that suggest economic growth remains steady, some analysts and investors have been pecking at Federal Reserve Chair Jerome Powell. They’re keen for the Fed to implement a rate cut, which could stimulate economic growth and help push stock markets higher, because inflation is lower than ideal, reported Howard Schneider and Ann Saphir of Reuters.
Recent data suggest core inflation is at 1.6 percent. That’s below the Fed’s target rate of 2 percent. Fed leaders have said they think low inflation may be temporary. Until a trend has been established to their satisfaction, they intend to do nothing. The Reuters article explained, “…preemptive…rate moves in either direction appear off the table for now, absent some unexpected event that raises new risks or shocks the economy into a higher or lower gear.”
Second-guessing the Fed is not new. In 1955, the ninth Chairman of the Federal Reserve, William McChesney Martin, offered this insight to the Fed’s work:
“Those who have the task of making [credit and monetary] policy don't expect you to applaud. The Federal Reserve…is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
On Friday, jobs data suggested U.S. economic growth continues apace. The Bureau of Labor Statistics report showed unemployment was at a 49-year low. The news made investors happy, and the Nasdaq Composite and S&P 500 finished the week higher.