Displaying items by tag: inflation

(New York)

The market has been worried that the trade war may prove inflationary. Higher tariffs would mean higher prices passed along to customers, in turn raising inflation. This is scary because it means the US could get caught in a stagnant economy with higher inflation, which would keep the Fed from cutting. However, the reality is that the trade war may in fact be deflationary instead. The reason why is two-part. Firstly, governments, businesses, and consumers are likely to take actions to off-set the rise in costs; and secondly, the economic toll may hurt the economy so that prices cannot rise.

FINSUM: We do not think tariffs will be inflationary. Thinking of them as automatically inflationary is very narrow-minded, as it does not actually take into account the effects tariffs will have on aggregate demand.

(New York)

For most of this year and last, the idea of a nasty full-blown trade war was like a boogey man that stalked investors, but still seemed a slightly distant threat. That is no longer the case, as an ugly trade war has rapidly developed into the status quo. Accordingly, many top analysts, such as at JP Morgan and Nomura, are saying that high US tariffs on China are here to stay. Market volatility is likely to continue as new news continues to stream out.

FINSUM: There is a lot to worry about in this trade war, but one of our immediate, but less discussed, concerns is about the intersection of tariffs, the Fed, and inflation. The tariffs are likely to raise US inflation by boosting prices for goods, which could keep the Fed from hiking, trapping us in a difficult environment.

(Washington)

The market shave been hoping, clinging, to the idea that the Fed will cut rates soon. Bond markets have all but assumed it with pricing, and even equities seem to favor the odds. However, the release of the most recent Fed minutes have all but put to bed those hopes. The notes clearly show that while the Fed is willing to leave rates where they are for some time, there is no appetite to cut.

FINSUM: One important caveat to these minutes is that the meeting was held just before the big blowup in US-China trade talks. At the time of the meeting, it looked like it would be smooth sailing to a deal.

(Washington)

Between the escalating trade war and weakening data, the economic outlook is darkening. Accordingly, the market is increasingly betting that the Fed will cut rates. The market is now pricing a 50%+ chance of a 25 bp rate cut by the end of the year. Additionally, the yield curve, which is once again inverted, is signaling future rate cuts.

FINSUM: If Trump keeps escalating the trade war with China, he will force the Fed to do exactly what he hopes—cut rates! Really though, the odds of a rate cut are rising as the trade war looks like an ever bigger headwind to growth.

(Washington)

Investors, take a deep breath, everything about the rate outlook has changed in the last 36 hours. For the first quarter of this year, investors thought we were on an inevitable course for rate cuts as the Fed appeared highly dovish. Then the last two days happened. First, Fed chief Powell delivered a much more hawkish speech than expected, saying that the factors that were holding inflation down were just “transitory”. Then, jobs data this morning blew everyone away with 263,000 jobs created in April.

FINSUM: We think these two factors are a big deal. It is very far from clear the Fed is going to cut (we think the risks are now skewed toward a hike). What makes this worrying is that a lot of the rally this year has been predicated on a dovish Fed.