China and the U.S. Seek Allies to Strengthen Sides in Trade Tussle
The U.S. and China look to be preparing for a protracted confrontation over trade and investment as they each try to line up allies for their cause. The struggle for support is being waged worldwide, with its locus shifting this week to Washington and the semi-annual meetings of the International Monetary Fund. Behind the battle: an effort by each country to gain an edge in their standoff over everything from steel to semiconductors. Much of the jockeying is likely to play out at Thursday’s meeting of finance ministers and central bankers from the Group of 20 and Saturday’s broader gathering of IMF member nations. “There’s a competition” between the world’s two-largest economies to garner backing for their respective positions, said David Dollar, who was the U.S. Treasury’s economic emissary to China from 2009 to 2013 and is now a senior fellow at the Brookings Institution in Washington. The concerted attempts at coalition-building suggest that neither nation believes that a quick resolution of their various disputes is a given. Such a festering could act as a damper on global stock markets and the world economy by making investors and businesses more cautious about the outlook. “I’m deeply concerned” about the relationship, said National Committee on U.S.-China Relations President Stephen Orlins, who worked on the normalization of ties between the two countries while at the U.S. State Department from 1976 to 1979. “Over the next 12, 18, 24 months it may be deeply, deeply disrupted.” Citing national security concerns, the Trump administration has slapped tariffs on steel and aluminum exports from China and a number of other countries, with Beijing responding with import taxes of its own on U.S. goods. Washington also has threatened to levy additional tariffs on a broad range of Chinese exports in a separate case involving intellectual property.
Here Are the Biggest Tariff Concerns in the Fed’s Beige Book
The U.S. economy may still be expanding at the now-familiar “modest to moderate pace,” but a new theme pervaded the Federal Reserve’s latest Beige Book report: tariffs and the threat of a trade war. The word “tariff” appeared 36 times in the report compared with zero references in the prior survey. Here are some of the highlights from the business survey released Wednesday, by regional Fed district: “In general, respondents were optimistic in their outlook. However, two contacts brought up the proposed China tariffs and said they represent a major risk. One was a toy manufacturer who sources 75 percent of their production from China. The second said that punitive tariffs on Chinese aluminum had already had a big effect: ‘Thin gauge foil’ is produced only in China and tariffs raised the price three-fold; the contact argued that ‘these tariffs are now killing high-paying American manufacturing jobs and businesses.” “Builders continued to note rising prices for construction materials as well as labor and noted concerns about a potential trade war. Contacts cited double-digit price hikes for lumber and drywall and expressed concern for steel and reinforced concrete. … Of the 22 manufacturing firms that offered general comments, seven mentioned impacts from recent tariffs or proposed tariffs — most noted rising prices or anticipated rising prices; just one firm anticipated greater demand.” “Upward pressure on input prices remained strong, particularly for commodities used by goods producers. According to contacts, recently imposed tariffs have accelerated price appreciation of steel products, in some cases at double-digit rates. … One steel manufacturer mentioned that customers are attempting to stock up as prices rise because of increased demand and tariffs on primary metals imports.”
U.K. Inflation Drops More Than Expected to Slowest in a Year
U.K. inflation slowed to the weakest in a year in March, raising questions about how quickly the Bank of England will increase interest rates. Consumer prices rose 2.5 percent from a year earlier, down from 2.7 percent in February, the Office for National Statistics said on Wednesday. That’s less than economists estimated and below the BOE’s most recent forecast of 2.8 percent for the same period. Core inflation cooled to 2.3 percent, also the lowest rate in a year. The figures may weaken the case for more interest-rate increases later this year. Policy makers are widely expected to raise the benchmark for a second time in six months at their May meeting as inflation continues to exceed the 2 percent target. Officials have also said they’ll likely need to raise borrowing costs several times over the coming years as domestically generated inflation pressures pick up. The pound tumbled after the data, sliding 0.7 percent to $1.4182 as of 10:19 a.m. London time. While a hike next month is still almost fully priced in by markets, traders now see about a 40 percent chance of a follow up in November, down from more than 50 percent at the start of this week. “The market is likely to question the likelihood of BOE rate hikes, both near term and later in the year,” said Alan Clarke, an economist at Scotiabank. “Even if the MPC does look through the low reading on this occasion and hike rates in May, this dilemma is likely to continue over the remainder of the year.” For hawks at the BOE, labor-market data published Tuesday provided ammunition, with the jobless rate falling to its lowest since 1975 and wages rising at their fastest pace in almost three years.
U.K. Retail Sales Fall More Than Forecast Amid Snow Chaos
U.K. retail sales plunged in March as snow and freezing temperatures kept consumers indoors and disrupted deliveries of stock. The data comes as a fresh blow to the British high street after a year of consumer pullback in the face of rising prices and sluggish wage growth. While pay and inflation data this week show tentative signs that the squeeze may be starting to ease, the weather disruptions have added to the problems facing big-name retailers such as department store Debenhams, which issued a profit warning Thursday amid weaker demand for discretionary items. The volume of goods sold in stores and online declined 1.2 percent, double the drop predicted by economists, according to figures from the Office for National Statistics on Thursday. Sales excluding auto fuel fell 0.5 percent, also more than forecast. The pound slipped after the data, falling 0.1 percent to $1.4183 as of 10:14 a.m. in London. The figures round off a week of weaker-than-expected reports that saw traders pare back bets on the pace on Bank of England tightening, with two rate increases this year seeming increasingly unlikely. Even so, policy makers will probably look through the weather-impacted retail data, according to Jean Boivin, head of economic and market research at BlackRock Inc.’s Investment Institute. “There are temporary factors at play,” he said in a Bloomberg Television interview. “I would be surprised if the framework in which the Bank of England is operating right now is predicated on this week’s numbers. This is worthy of note but I don’t think this is something that changes the view on whether you need two hikes or not this year.” Travel chaos paralyzed Britain from late February when the Beast from the East and then Storm Emma brought sub-zero temperatures and blizzard-like conditions to much of the country. Another blast swept in around the middle of the month. Among the worst hit were sales of clothing and household goods, down 0.7 percent and 0.2 percent respectively. Supermarkets saw sales fall 0.6 percent and sales of auto fuel plunged 7.4 percent as consumers turned to online shopping and local food stores amid the bad weather. Internet sales overall accounted for 17.4 percent of sales in March, a record high.
China’s Economic Numbers Have a Credibility Problem
China’s gross domestic product grew 6.8 percent in the first quarter, smack on its pace in the preceding quarter, which was unchanged from the quarter before that. It’s a well-established pattern: Since 2015, China’s quarterly growth figures haven’t varied by more than 0.1 percentage point on a year-on-year basis. That contrasts with the U.S., where swings of a full percentage point from quarter to quarter aren’t uncommon. Getting an accurate read on the world’s second-largest economy has never been more important. China supplied around one-third of global growth in 2017, up from 18 percent in 2007, according to Bloomberg calculations. That means an economist working at the Reserve Bank of Australia in Sydney and a number cruncher in the sales department at Vale SA, the giant iron ore exporter based in Rio de Janeiro, both need Chinese data to help generate their forecasts. And with officials in Beijing promising to open the nation’s financial markets to the outside world, the ranks of investors who rely on this information are bound to grow. The world has long suspected that China fudges its numbers, which is why the investment community has assembled an array of alternative measures, including rail cargo volume, electricity use, and satellite imagery of factory sites, to gauge economic output. “I suggest investors ignore China’s GDP growth rate,” says Andy Rothman, a former U.S. diplomat in Beijing who’s now an investment strategist at Matthews Asia, a money manager. “There are so many other data points which help us understand the health of the Chinese economy and which we can verify by comparison with private data.” High-frequency metrics on movie ticket sales, iron ore imports, and orders for bulldozers are considered a more useful measure of demand in key sectors from consumption to construction. Bloomberg Economics’ monthly growth tracker, which shows more variability than the official GDP number, registered growth of 6.97 percent in March. The variety of proxy indicators available can’t completely dispel investors’ concerns about a lack of transparency that makes pricing risk in China especially difficult. “If the official data lacks credibility, alternative narratives—like an economy on the verge of a hard landing—can take hold,” says Tom Orlik of Bloomberg Economics.