Displaying items by tag: tariffs
Markets have indigestion this week, but is a recession any more of a threat than it was a couple weeks ago? The answer is yes. So far the manufacturing side of the economy has been the weaker one, with the consumer side staying strong. However, all the tariffs that have been imposed on China will now hit the side of the US economy that is strongest—the consumer—by raising prices at the register. Therefore, the trade war will directly weaken the best part of the economy, which could seriously curtail growth.
FINSUM: To protect against this, investors may want think about shifting into defensive shares like consumer staples, healthcare, utilities, and real estate, all of which tend to outperform cyclicals in a down economy/market.
While investors might not feel it right now, tariffs do have some upsides. The most direct one—revenue for the US Treasury. US Treasury income is surging because of the recent tariff hikes on Chinese goods. The rolling 12-month sum of customs duties collected by the Treasury (through the end of June) was $63 bn, almost double the sum of the same period last year. If Trump enacts another round of planned hikes on September 1st, the US will likely collect $100 bn in tariffs this year.
FINSUM: This is a good number, especially at a time of major government over-spending. However, it must be remembered that the large majority of this bounty will be eaten up by aid paid to US farmers as part of tariff relief efforts.
Trump’s tariffs are having a major impact on the US’ trading relationships. The data has been showing such, but now there is a very significant data point: China is no longer the US’ largest trading partner. Mexico has now assumed that position. The decline in trade with China comes alongside an escalating trade war that has seen tariff hikes and restrictions on both sides.
FINSUM: We are now officially of the position that this trade war with China will not be resolved any time soon, so this decline in trading seems to be the end of an era.
The market is going through a fit, and it is entirely self-induced. Firstly, the Fed hit markets with an unexpected lack of dovishness earlier this week. Then, just a day after, President Trump did what many feared he would—he announced another large round of tariff hikes on $300 bn of Chinese goods. Many suspect the move is part of an effort to push the Fed into cutting rates after it downgraded its language to calling the trade war merely a “simmer”. Markets fell sharply on the news.
FINSUM: Trump is trying to push both China and the Fed. It will likely work with the former, as they don’t have much of a choice if the economy looks vulnerable, but this is certainly not going to help China get back to the table.
It has been a very bumpy run for US-China trade talks this year, but after a significant hiatus, China will again return to the negotiating table with the US in September. The most recent round of talks, in Shanghai, just concluded without an agreement, but there were some signs of life, as China buying US farm goods was discussed. The negotiators only stayed in Shanghai about 24 hours.
FINSUM: This seems to us like quite an intractable issue. We do not expect a forthcoming agreement any time soon.