EC Monthly Macro Monitor: The Tempest

The Trump administration raised tariffs last week from 10% to 25% on $200 billion worth of Chinese goods and are considering tariffs on another $300 billion of Chinese goods. The Chinese retaliated this morning, raising tariffs to 25% from 5% and 10% on various goods totaling $60 billion. Obviously, the trade negotiations are not going well. Stock markets around the world have fallen as a result, fears of recession rising again as institutional memories of Smoot-Hawley trigger investors’ flight response.

Stocks are not one of the market indicators we follow to inform us about the current state of the economy. The main reason for that is that stocks and economic growth are not highly correlated except over the very long term. The other reason is that stock investors tend to be more emotional than bond investors, reacting to every bit of news whether it is truly newsworthy or not.

That isn’t to say the trade negotiations with China aren’t important, although newsworthy is debatable. They are important but not for the immediate tariffs being imposed. The numbers associated with these tariff levels just aren’t large enough to impact the US or Chinese economy that much. The monetary value of the Chinese retaliatory tariffs is roughly $9 billion on a US economy of nearly $20 trillion. The direct impact is tiny. The US tariffs on China are slightly larger, amounting to about 0.25% of Chinese GDP. Still, we aren’t talking about a large direct impact.

And when we look at our bond and other non-stock market indicators, we see that the response has been quite a bit more muted than in the equity market. Even in stocks, despite some big Dow numbers on my screen today, the selloff hasn’t even reached the 5% threshold. That’s no bear market, not even a correction. About the only name, I could assign to the move so far is “profit taking” after a double-digit move YTD.

I last wrote an update on our market indicators back on March 25th, during a time when a trade deal seemed a lot more likely than it does today. The change in most of our indicators is almost imperceptible. The 10 year Treasury Note yield is down a grand total of 2 basis points. The 2 year is basically unchanged. The yield curve is unchanged. Credit spreads are actually narrower. The dollar has screamed higher by…1%. Gold is down 1.6%. If I told you seven weeks ago that trade negotiations with China would deteriorate to the point that the Trump administration would follow through with their threat to raise tariffs, would you have expected these markets to be essentially unchanged?

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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