Market Shrugs Off Latest US Tariff Provocation

Trump toys with investors. After playing up the possibility of a deal with President Xi this weekend, he told the Wall Street Journal that he expects to go forward with the plan to increase the tariff on $200 bln of Chinese goods to 25% from 10%. Chinese officials have reportedly signaled that preventing that tariff increase was their primary objective. At the same time, Trump reiterated his threat to levy a 10% or 25% tariff on the remained $267 bln of goods the US imports from China. This would include consumer electronic goods too. Trump recognized that a 25% tariff would be a big blow to US consumers, but he seemed to suggest that people can cope with a 10% tariff. US shares weakened in after-hours trading after the report was published. 

The US reports on house prices and consumer confidence today will be overshadowed by the beginning of the flurry of Fed speakers over the next few days. While all Fed officials have their own opinions, some are more impactful than others. The Federal Reserve Board Vice President Clarida speaks in NY before the equity market opens. He has endorsed the continued gradual increase of rates to neutrality. Later in the session, regional Presidents, Bostic, Evans, and George are on a panel discussion. Although Bostic is among the most dovish members, he and George are voting members of the FOMC, and both supported the September hike. Bostic has argued for a pause and therefore may dissent from a decision to hike next month. Powell speaks tomorrow at lunch in NYC. The Fed's leadership-Powell, Clarida, and Williams--and are showing a united front. 

In addition to the weekly four- and eight-week bill auctions the US auctions $40 bln five-year notes today. This may be the sweet part of the curve. The shorter maturities are weighed by prospects of Fed tightening, while the 10-year may be too risky, given the debt profile. The five-year may also be tenor that attracts foreign central banks.  After the markets close, API will provide its estimate of oil inventories. The EIA will report its estimate tomorrow. It could be the first decline in nine weeks.  

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Marc Chandler 1 year ago Author's comment

Yes. Thank you. Deflation in goods and maybe not all goods but some. Not services, and as you know American households spend more on services than goods. Also, if inflation/deflation refers to general price levels, the idea that US auto sector has excess capacity could be expressed as a relative price change rather than general price change.

Kurt Benson 1 year ago Member's comment

Nicely done.

Gary Anderson 1 year ago Contributor's comment

With capacity utilization under 80, to say the US has excess capacity is a warning of deflation, Marc.