Trade wars and temper tantrums ...
Trump's decision this week to increase tariffs on Chinese goods caught markets by surprise. Close advisors to the President had thought further hikes were off the table pending the next round of trade talks.
Irritation with China boiled over as Treasury Secretary Steve Mnuchin and Trade Rep Robert Lighthizer returned empty handed from Shanghai. No new proposals were on offer from the Chinese administration, following the impasse in May.
Trump snapped. The cease fire was over. The President promised to "tax the hell out of China". A busy week for the President included planning the annihilation of Afghanistan and a big beef deal with Europe. Trump tweeted the "future between our two countries (China U.S.A.) will be a very bright one!" Markets were not quite so sure.
Earlier in the week, the Fed had obliged with a rate cut ... "A mid cycle adjustment" of just 25 basis points. Stock markets bounced, Trump expressed disappointment. What the market wanted to hear from Jerome Powell Chairman of the Fed, was the beginning of a lengthy and aggressive rate cutting cycle which would keep pace with China and the rest of the world. As usual "Powell let us down".
The Fed is confused about the direction of travel. Expansive tax cuts and spending plans are set to maintain growth in the U.S.A. The latest data on jobs suggests the economy continues to grow. Payrolls increased by 164,000 in July, the unemployment rate held at 3.7%. Powell speaking at the news conference this week, suggested the outlook for the U.S. economy remains favorable.
So why the rate cut now? Powell added "the Fed was acting to insure against the downside risks from weak global growth and trade policy uncertainty." Uncertainty over trade is slowing the global economy and no one knows quite what to do about it. Powell admitted, he and other experts overseeing the economy are confronting “something that we haven’t faced before.”
“The thing is,” Powell said, “there isn’t a lot of experience in responding to global trade tensions.” “We’re learning by doing.”
Learning by doing and reacting to a rogue President with random ideas on international economics. Trump believes that China is paying for the tariffs. The truth is the American consumer is paying the bill. Tariffs are in effect a tax on consumption. The hikes planned for September will increase the levy to around 0.5% of GDP.
The Fed is reacting to Trump policy on trade. The planned increase in September will hit imports from China including children's toys, video games consoles, mobile phones and laptops. Many will feature on gift lists for the end of year. "Trump has declared war on Christmas", according to Jock O'Connell, an international trade adviser to Beacon Economics. A war on Christmas and China is not picking up the tab ...
Confusion over Brexit ...
The Bank of England held rates this week. Uncertainty and confusion over Brexit produced a wait and see attitude by the MPC. U.K. growth is slowing, investment is falling, for the moment, job growth continues and real wages are rising as inflation levels are subdued.
The Bank has reduced growth estimates over the forecast period. Global trade tensions have increased, global activity has remained soft. Manufacturing growth is falling around the world as trade volume growth slows.
For the Bank, the likelihood of a no deal Brexit has increased significantly. The Governor warned, the response of monetary policy will not be automatic and it could be in either direction. Sterling closed just above the $1.21 level this week. The Bank has warned this could be a taste of things to come.
Boris Johnson made a quick trip around the Union this week. Greeted with boos in Edinburgh and a lost seat in Brecon, it will take more than photo ops with a chicken to convince the EU the new team is strong in purpose. The car industry is facing severe disruption, Japan has made it clear, the UK is the gateway to Europe. Without a trade deal, relocation is inevitable.
Internal government analysis warns of consumer panic, food shortages, medical supplies lost and chaos in the farming sector. This week Alun Cairns, Secretary of State for Wales offered some hope to farmers.
The market in Japan has just opened to Welsh and British farmers. "Exports are already taking place. This is a market in which we haven't scratched the surface yet. "
The UK exports almost £400 million of lamb products to the EU. Exports to Japan are expected to be around £10 million each year for the next five years. Lambs to the slaughter, is the real campaign slogan for the Brexiteers in Westminster ... if only China could shed that addiction to pork ...
Markets react to week of turmoil ...
Red on the screens of markets around the world by end of week, traders were forced to react to the threat of a further round of tariffs against China. Beijing is making it clear, there will be no conciliatory response to the Trump attack. A long haul is expected before a resolution is secured.
Japan on Friday moved to increase controls on the export of a broad assortment of products to South Korea. Tokyo is raising the stakes in a political standoff that has plunged relations between the countries to their lowest point in decades.
South Korea’s president, Moon Jae-in, condemned the move, which he said was aimed at sabotaging South Korea’s economy as it struggles with slowing growth.
That's the problem with trade wars. They tend to escalate and operate indiscriminately. Central bankers are confused by the self harm inflicted by Trump and tariffs, Boris and Brexit.
Central Bank commitment to maintain Q E levels is pushing bond yields lower. Ten year gilt yields closed at 0.56% in the UK. U.S Treasuries closed down 20 basis points to 1.88. In Europe, yields were negative 50 basis points. Why buy a negative yield? Well it could get more negative in the months ahead, the rationale.
The Dollar is rising in value at the expense of Sterling, the Euro and the Renminbi. Oil prices are falling as fears for global demand increase. The threat of negative interest rates on bank deposits increases. Proposals are circulating for the abolition of cash ... Yes this week, the trade wars just got a bit more scary ...
That's all for this week, have a great weekend. We will be back with more news and updates next week!
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.