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Bob Mason

The Trade War

The U.S – China trade war has now been in full swing since last summer’s first roll-out of tariffs on washing machines and solar panels, all of which preceded the wider-reaching tariffs on aluminum and steel imports.

While both the U.S and Chinese economies appeared to have been largely unaffected through the 2nd half of last year, things have certainly changed.


The retaliatory measures taken by both economic super-powers have begun to take their toll.

Economic data out of China has left key trading partners in a state of economic flux. Uncertainty over what lies ahead led to both the RBNZ and RBA cutting interest rates.

All of this in spite of continued economic growth and tightening labor market conditions.

For the U.S, the FED had projected growth for this year to hit 2.3% back in December. In March, the FED revised growth for 2019 down to 2.1%, with the unemployment rate expected to creep up from 3.6 to 3.7%. December projections had put the unemployment rate at 3.5%.

A string of disappointing economic indicators out of the U.S has ultimately left FED Chair Powell with little choice but to step in.

In May, the U.S equity markets went into a spin. With the U.S President’s deal-making style, support from outside of the White House was needed.

It wasn’t long ago that the U.S President had attempted to sway the FED into cutting rates. While the FED has yet to make a move, U.S President Trump may have discovered a new way to manipulate, without actually manipulating.

The Dollar Spot Index has come off its highs of just shy of 100 and there may well be more downside to come. Trump’s not only eyeing Mexico but there is also the EU that lies in his trade warpath…


What Lies Ahead

Assuming that there is no immediate resolution to the U.S – China trade war, the FED may well have to cut rates and possibly on more than two occasions.

Back in December, the FOMC projected the Federal Funds Rate to hit 2.9% this year. In March, the medium projection slipped to 2.4%.

This month’s FOMC economic projections will be of particular interest. How much of a revision will there be to growth for this year and next year?

A material downward revision would raise the prospects of a 3rd quarter rate hike.

The IMF has forecasted that the trade war will impact the global economy by 0.5%, equivalent to $455bn.

Looking at the ADP numbers, Trump’s 2020 presidential election campaign could be hitting the speed bumps early. Friday’s labor market figures will provide a better indication. We can expect the markets to react to both wage growth and nonfarm payrolls.

Either the U.S or China will need to compromise to bring the trade war to an end. For now, neither side looks willing or perhaps even able to take the higher road.

When considering the impact on the global economy, it’s not just the FED that will be looking to deliver support. The RBNZ and RBA have already made their moves. That leaves the ECB, Bank of Japan and Bank of Canada to respond.

For the Bank of England, Carney had spoken of a more aggressive rate path to curb inflation. The Bank of England Governor may also need to take a step back.

It all looks very much like a currency war is in the making…

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