Trade Games

Global equities were whipsawed around in March on global trade fears. Early in the month, the Trump administration announced that steel and aluminum imports would begin to receive tariffs of 25% and 10%, respectively; which many interpreted as a regressive policy towards free-trade economics. Eventually the tariffs were enacted, but many countries gained exemptions until this coming May. 


The growing trade deficit of the US has come under increased scrutiny as of late. Notably, the trade deficit now runs around $653 billion annually and continues to grow. It is being criticized for its adverse effect on measures of US output (GDP). Some experts cite that the trade deficit weighs down GDP by as much as 1% annually. Without the effects of trade, GDP would easily trend above 3% per year. The latest estimate of GDP was recently revised up to an annualized rate of 2.9% for the fourth quarter of 2017.


Ironically to tariff policy, US trade of primary metals represents only a small part of the annual trade deficit. Currently, monthly US imports of primary metals are about $3.8 billion more over exports. What’s more is American companies export about $4 billion of primary metals per month. Retaliatory tariffs on metals by America’s trading partners could easily threaten American exports.


US imports of consumer goods and vehicles, however, are the lion’s share of the US trade deficit. Both components of trade would be ripe for picking should American leadership wish to slash overall US imports by a greater proportion. In fact, later in March, the Trump administration provided a memorandum stating that Chinese imports into the US could receive tariffs of about $60 billion. China quickly responded with a plan to impose $3 billion of tariffs on US exports that are sent to their borders. Both countries agreed to a 30-day consultation period before any policy became final. 

 

"The growing trade deficit of the US has come under increased scrutiny as of late. Notably, the trade deficit now runs around $653 billion annually and continues to grow."

 

Still, global equities extended losses this year while commotion of global trade policy was occurring. Some of the hardest hit stock markets are export countries located in East Asia and in Europe. Furthermore, the best performing index of US tech stocks this year was set back by a scandal surrounding a famous social media website. The bad publicity aligned with a selling frenzy of other big-name US tech stocks. Still, even after heavy selling, this popular stock index of US tech companies has held on to its positive gains for the year.  


Nevertheless, The US outlook remains favorable with manufacturing and industrial production at the focus of today’s economy. Specifically, plants are operating near full capacity and strong data has shown up in economic sectors such as mining, business equipment, construction supplies, and vehicle production. 


US consumer sentiment also continues to strengthen. Consumers’ homes are now worth more than they were just one year ago. The Case-Shiller home price index showed year-over-year gains of about 6.4% in February, and the Federal Housing Finance Agency’s own measure of home price gains indicates a national 7.3% year-over-year trend. However, related to housing turnover, recent existing and new home sales data has slowed down.


Latest data on US inflation and global inflationary trends continue to show tameness. That has allowed big central bank policy decisions to stay on a steady course, which provides quality of life for financial markets. A popular price index watched by the US Federal Reserve Bank (Fed) is currently trending between 1.5% and 1.8%. The trend is still slightly below the Fed’s target. The Fed, however, did raise interest rates another 0.25% in March and maintained their outlook. Other global central banks held their rates flat in March on their own benign inflation data. 


Finally, 10-year US government borrowing costs came down slightly in March to put the yield back below 2.8%. Crude oil prices slightly rose even though US inventories grew. Gold added some small gains. Finally, the US dollar was flat. The US dollar maintains its annual losses against its major trading partners.

Advisory Alpha