Donald Trump has escalated the trade war with China by announcing plans to hike the tariff imposed on $200bn of Chinese goods from 10% to 25% on Friday.
The US president also threatened to impose tariffs on all Chinese trade with America, a move that could further destabilise relations between the two economic powers.
The move is a blow to hopes that Washington and Beijing could be nearing a deal to end the trade dispute that began last year.
The president announced the move on Twitter, complaining that negotiations between the two countries were proceeding too slowly.
Trump originally imposed a 10% tariff on these goods last September in an attempt to cut America's trade deficit with China and force concessions on issues such as intellectual property rights. It had been scheduled to jump to 25% in January but the president held back while talks between the two sides continued.
Currently, almost half of China's sales to America are affected by tariffs and Trump is now aiming for the remaining $325bn.
He warned: "325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!"
Such a move could cause further pain and disruption to the Chinese economy, and probably trigger retaliatory action by Beijing.
Patrick Chovanec, chief strategist at Silvercrest Asset Management, warned that Trump's move could disappoint investors and push -markets down.
"The prospect of higher and broader tariffs was one factor that drove markets down in the fourth quarter of 2018, but markets have since come to believe that some sort of deal was imminent to avoid them," Chovanec said.
But Reva Goujon, vice president for global analysis at Stratfor, suggested that Trump's move could be a ploy to help get negotiations over the line.
Economists have blamed the US-China trade war for a slowdown in global growth in recent months.
The US treasury secretary, Steven Mnuchin, and trade representative, Robert Lighthizer, held talks with China's vice-premier, Liu He, in Beijing last week. Liu was expected back in Washington within days.
Despite Trump's claim that China pays these tariffs, they are actually paid by US companies when they import goods. Those firms can choose to pass the cost on to their customers through high prices, absorb the cost and lower their profits, or try to negotiate the cost of the goods down.
3)
CENTRAL BANKS
As central banks turn dovish, how loose will this year's monetary policy be?
Nicholas Spiro says the Federal Reserve's more cautious stance towards raising interest rates has set the pace for other central banks. However, while the US economy may be showing signs of slowing, China and Europe are of greater concern
In the middle of November last year, the yield on one-year Chinese government debt fell below its American counterpart for the first time ever, according to data from Bloomberg, dropping to 2.5 per cent as Beijing's shift towards more growth-supportive measures gathered pace. The yield gap between the two countries' 10-year bonds had also narrowed sharply, dropping to just 30 basis points as the divergence between Chinese and American monetary policy gained momentum.
It was not just the Federal Reserve and the People's Bank of China that were parting ways. A succession of US interest rate increases, coupled with expectations of further tightening this year as America's economy powered ahead, contrasted starkly with a slowdown in growth in the euro zone. By early November, the spread between US and German 10-year bond yields had increased to nearly 2.8 percentage points, its widest level in almost three decades.
Divergences in monetary policy were also becoming more pronounced across emerging markets. While some economies, such as Brazil and Colombia, reduced borrowing costs to help stimulate growth, others, notably Indonesia and the Czech Republic, joined the Fed in raising rates with the aim of maintaining financial stability.
Yet, since the beginning of this year, a synchronised global slowdown, driven by a sharp deceleration in China and Europe, has taken root. The publication last Tuesday of survey data on global manufacturing and service-sector output, compiled by IHS Markit, showed that growth slowed to its weakest level last month since September 2016. This has brought about a shift towards looser – or at least less tight – policy stances in both advanced and developing economies.
An employee uses a robotic arm while working on a Siemens angiography system on the assembly line at the Siemens AG Healthineers factory in Forchheim, Germany, in July 2017. A survey of global manufacturing and services output showed that growth slowed to its weakest level in January since September 2016. Photo: Bloomberg
The dovish tilt is being led by the Fed. In a dramatic change to its outlook in December when it raised rates and signalled further hikes this year, the Fed announced at its meeting last month that it would be patient before making any future adjustment. It even hinted that the next move could be a rate cut if America's economy – which remains buoyant – succumbs to the global slowdown.
This abrupt reversal on the part of the world's most influential central bank has changed the policy landscape, making it easier for other central banks to move in a more dovish direction.
Last Wednesday, Philip Lowe, head of the Reserve Bank of Australia, warned of an accumulation of domestic and external risks which made a rate cut more likely, causing the Australian dollar – a proxy for sentiment towards China – to suffer its steepest daily decline since last August. The following day, the Reserve Bank of India unexpectedly cut rates, citing subdued inflation. Central banks in other emerging markets that hiked rates last year, notably the Philippines and the Czech Republic, are also striking a more dovish tone.
Shaktikanta Das, governor of the Reserve Bank of India, announced a surprise 25-basis-point cut to the country's interest rate last week. Photo: Reuters
However, it is inEurope where the scope for sharper reversals is most apparent.
On Thursday, the Bank of England slashed its forecast for growth in Britain this year from 1.7 to 1.2 per cent as it shelved plans for further rate increases, warning that the risk of a recession would rise if the UK left the European Union at the end of March without a deal and no transition arrangements in place. The same day, the European Commission painted a bleak picture of growth in the euro zone, forecasting that Italy – which is already in recession – will barely grow this year, while Germany will expand by just 1.1 per cent.
As I argued previously, this leaves the European Central Bank, which terminated its quantitative easing programme last December, in an awkward position. If even the Fed is giving itself room to cut rates when America's economy is still growing at a relatively brisk pace, then the ECB, which downgraded its outlook for the euro zone last month, should have already eliminated the possibility of a rate hike later this year. A more dovish stance is only a matter of time.
The Fed-led shift towards a looser policy stance has already contributed to an easing of financial conditions across developed and emerging markets. Global stocks are up more than 7 per cent this year, while spreads on corporate bonds have narrowed significantly.
However, the US dollar, which began to weaken in December as investors started pricing in a more dovish Fed, has strengthened markedly since the beginning of this month. The dollar index, a gauge of the greenback's performance against a basket of other currencies, has enjoyed its longest winning streak in two years.
This is because the US, although showing signs of slowing, is still in a stronger position than the world's other leading economies. The Fed may have turned dovish, but it is China and Europe that are the epicentre of the slowdown, benefiting the greenback.
Still, divergences in global monetary policy have narrowed markedly over the past several weeks. As the clamour for more forceful stimulus measures in China intensifies, it is the degree of dovishness on the part of Fed and, in particular, the ECB which is now the focal point of speculation among investors.
Global Central Bank Patience to Keep Stocks Steady
Central banks are stuck in wait-and-see mode awaiting further clarity from policies that have been firmly in place from last year. It appears the markets are convinced that the Federal Reserve's next move will be a rate cut and that the People's Bank of China (PBOC) will deliver more stimulus after China is able to finalize a trade deal with the United States. The European Central Bank (ECB) was contemplating further stimulus, but a recent run of better-than-expected data may have the ECB on sidelines for a while.
It is likely that the Fed, PBOC and ECB will all need to be patient and wait until after the summer before contemplating any policy shifts. That prolonged wait could provide for some choppy performance in equities, which could see thin conditions lead to some temporary pullbacks.
U.S. stocks have greatly benefited from accommodative stances from the Fed, especially the January pivot, but it seems that the bulk of earnings have provided mixed results and a mixed outlook that are causing many investors to head for the sidelines. The S&P 500 remains near record highs, while nearly 25% of its components are still in bear market territory. The S&P 500 is having its best start to the year since 1987, and we could see many investors walk away.
The bullish case for stocks should remain in place despite investor reassessment on rate cut expectations following this week's Fed remarks. While the Fed may feel transitory factors are at work with inflation, increased productivity could mean that the economy can strengthen without driving inflation higher.
Fed
After the news from the Federal Open Market Committee (FOMC), Treasury yields surged higher as expectations remain firmly anchored that the Fed will be patient and keep rates steady before possibly delivering a rate cut. The spread between the U.S. 10-year and two-year Treasury yields continues to widen as yields surge across the board. The steepening of this part of the curve should eventually be felt in the economy in the later part of the year. It appears that inversion concerns will become a distant worry and that we may not see recession concerns resurface until next year.
Bloomberg Finance L.P.
ECB
The Eurozone economy is showing flashes of improvement, but that will need to be a sustained trend before the ECB abandons the idea of more radical monetary policy stimulus later this year. The ECB is unlikely to have a rate rise until the middle of next year at the earliest. We could see those expectations moved up if we see the ECB settles on a hawk, such as Bundesbank President Jens Weidmann, to replace ECB Chief Mario Draghi when his term ends in October. Regardless, accommodative policy will be in place for the rest of 2019.
PBOC
The PBOC is unlikely to change its easing bias any time soon, as several key components of the economy remain weak. The central bank is concerned about pumping too much cash into the economy, but we should not expect that to derail further stimulus if we continue to see softness from the world's second largest economy.
The Bottom Line
The S&P 500 Index could be in for a choppy period that could warrant a 3% to 5% pullback. Weaker economic data is what will be needed to cement a rate cut from the Fed. For traders who were around in the mid-'90s, this will draw many comparisons to the time former Fed Chair Alan Greenspan delivered a rate cut after raising rates a few times in 1995.
4)INFLATION
Euro-Area Inflation Accelerates After String of Upbeat Data
Inflation in the euro area accelerated more than forecast and a core measure jumped the most in nearly a year, capping a week of encouraging data for the European Central Bank.
Consumer prices rose 1.7 percent in April from a year earlier -- the strongest number since November. The narrower inflation gauge that strips out volatile components such as energy and food came in at 1.2 percent, a six-month high, surging from 0.8 percent in March. Both readings beat economist estimates.
The pickup in inflation -- a key metric for the ECB's monetary policy -- comes just days after a report showing the pace of growth in euro-area economy unexpectedly doubled in the first quarter amid a surge in Spain, resilience in France and a rebound in Italy. That should make additional stimulus less urgent, with policy makers already expressing some confidence that the economy is stabilizing. Bund yields turned positive at the start of the week and have kept rising each day as the economic data improved.
Bundesbank President Jens Weidmann on Thursday touted Germany's excellent labor-market situation and rising incomes as a source of strength for private consumption that should tide the economy over its soft patch. He also urged the ECB to press ahead with its exit from unconventional monetary policy if inflation allows.
What Bloomberg's Economists Say
"The recovery in inflation will reassure policy makers at the European Central Bank that the economic slowdown might pass before it causes inflation to ease." --Maeva Cousin, economist
The pickup in price growth may have been partly driven by temporary factors that are likely to unwind in May. Germany data earlier this week showed inflation accelerated at the fastest pace in five months in April on the back of surging cost of package holidays -- a side effect of Easter holiday that came later than last year.
The reading for core inflation now matches a ceiling it hasn't breached in two years, underlining the struggle for the ECB to achieve sustainable increases in consumer prices.
4A) LABOUR
Hiring surge pushes US jobless rate to 49-year low
A hiring surge by US employers drove the unemployment rate to a 49-year low in April, but the strong numbers failed to quell pressure from the Trump administration for Federal Reserve interest rate cuts.
Non-farm payrolls rose 263,000, according to the labour department, comfortably above Wall Street forecasts of a gain of 190,000. Average hourly wages were up 3.2 per cent year-on-year, unchanged from the previous month when expectations were for a slight increase.
The unemployment rate fell from 3.8 per cent to 3.6 per cent — the lowest since December 1969. The drop resulted in part from the departure of nearly 500,000 people from the labour force.
The strength of the US labour market has eased fears of an economic slowdown which, earlier this year, some bond market indicators had suggested could be coming soon. Last week's blowout GDP report, showing 3.2 per cent annualised growth, also suggested the economy is holding up better than expected.
Equity markets have bounced back following the violent sell-off seen at the end of 2018, with both the S&P 500 and the Nasdaq Composite setting new highs this week. They rose on Friday after the release of the latest jobs report.
"JOBS, JOBS, JOBS!" President Donald Trump tweeted after the release of the data.
For the Fed, the lack of an uptick in wage growth in April should strengthen its resolve to keep interest rates on hold for the time being. On Wednesday, Fed chairman Jay Powell disappointed some investors by saying there was no immediate need to move interest rates higher or lower, in defiance of repeated calls from Mr Trump for the central bank to loosen monetary policy.
After months of living with the coronavirus pandemic, American citizens are well aware of the toll it has taken on the economy: broken supply chains, record unemployment, failing small businesses. All of these factors are serious and could mire the United States in a deep, prolonged recession. But there's another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed. You may think that such a crisis is unlikely, with memories of the 2008 crash still so fresh. But banks learned few lessons from that calamity, and new laws intended to keep them from taking on too much risk have failed to do so. As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse. John Lawrence: Inside the 2008 financial crash The financial
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