Overseas Headlines– July 4, 2018

Date: July 4, 2018 

United States:

Trade War ‘Would Be Horrible’ for the U.S. Economy, Arthur Laffer Says

Arthur Laffer, a former economic adviser to President Ronald Reagan and to Donald Trump’s campaign, said the threat of a global trade was hanging over the U.S. economy and could undo the pro-growth policies that Trump has championed. “I don’t think we’re going to have a trade war, but if we did, it would be horrible,” Laffer told Bloomberg Television in an interview Tuesday. “We’ve got all sorts of things going for us and the only thing blocking is the threat of trade war.” Laffer, perhaps best known for his “Laffer Curve” principle of supply-side economics that argues tax cuts help pay for themselves by spurring growth, said “no economist in his right mind would ever want a trade war.” Laffer praised Trump for an “amazing” performance as president and added, “I don’t think he wants a trade war at all,” citing a potential drag on financial markets. The U.S. has imposed 25 percent tariffs on imported steel and aluminum and threatened to slap more levies on other products from some of its biggest trading partners, including China, Canada, Mexico and the European Union. Tariffs on $34 billion in Chinese goods are set to go into effect Friday. The other nations have vowed to retaliate in what would amount to a trade war that could raise prices and slow the global expansion. “The evidence is so clear that trade wars destroy economies globally,” Laffer said.



U.K. Services Growth Unexpectedly Jumps as Economy Picks Up

The U.K.’s dominant services sector grew at the fastest pace in eight months in June, driving a bounce back in the nation’s economy and boosting the case for a Bank of England rate increase as soon as next month. The unexpected gain in the gauge of activity followed reports this week showing faster growth in manufacturing and construction. IHS Markit, which publishes the surveys, said they suggest U.K. economic growth doubled to 0.4 percent in the second quarter. That backs up the argument of BOE officials who say that the economy is rebounding after a weather-hit first quarter — a case that may be further strengthened by evidence from the survey showing that input costs also spiked in June. Markit predicts that will cause U.K. inflation, already above the BOE’s target, to climb from its current level of 2.4 percent. The pound erased a 0.2 percent slide after the report to trade little changed at $1.3208 as of 10:25 a.m. London time. “Stronger growth of service-sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher,” said Chris Williamson, chief business economist at Markit. This week’s reports are the last full set of PMI readings BOE policy makers will get before they announce their next decision on Aug. 2. Officials voted 6-3 to hold rates at their June meeting, and investors are currently pricing in about a 65 percent chance of rate increase next month. Markit said its Purchasing Managers Index for the services industry climbed to 55.1 last month, up from 54 in May and beating economists’ estimates for no change. The survey Wednesday also showed the fastest pickup in new work in 13 months, an upturn in demand for business and financial services, and evidence that the sunny weather last month boosted consumer spending. Still, even with growth gaining momentum, there remain signs that Brexit-related uncertainty is continuing to hold back investment, Markit said.



Trade War’s Surprise Winner in Asia: Chinese Government Debt

When it comes to Asian sovereign bonds it’s better being at the epicenter of a U.S.-China trade war than on the fringes of the quake radius. Chinese and South Korean notes are climbing as the rise in protectionism batters their stock markets, drives a flight to safety and, in China’s case, prompts a more dovish monetary policy. Indonesia, India and the Philippines, by contrast, are more removed from the turbulence but are suffering from currency vulnerability due to current-account deficits. The proportion of foreign ownership is the other big differentiator as the simmering tension threatens to boil over into all-out war on July 6 when a deadline for U.S. duties kicks in. China and Korea — plus Thailand and India — benefit from a relatively small offshore presence, while Indonesia is at risk. “Markets with a deep onshore investor base will be better insulated from swings in foreign portfolio flows,” said Jennifer Kusuma, a senior Asia rates strategist at Australia & New Zealand Banking Group Ltd. in Singapore. A relatively benign economic outlook for China, South Korea, Thailand and Malaysia will aid their bonds as investors avoid risk-taking, while Indonesia, India and the Philippines are exposed, she said. Chinese government debt is already benefiting from the trade spat as stocks have fallen into a bear market and a reserve-ratio cut has boosted liquidity. Foreign investors bought the bonds at the fastest pace since September 2016 last month, while the 10-year yield reached a 14-month low of 3.47 percent on July 2. The notes stand to gain if the People’s Bank of China eases policy further to safeguard growth. Further declines in the yuan are a risk for foreign investors, but the PBOC pledged on Tuesday to keep the currency stable. “Any worsening of the China-U.S. trade spat would be good news for sovereign bonds, as it would pressure the economy and weaken risk appetite,” said Meng Xiangjuan, an analyst at SWS Research Co. in Shanghai. “But as investors already have a very pessimistic outlook on the trade tensions, the room for any sharp declines in yields is limited,” she said, adding that the 10-year yield could drop to as low as 3.40 percent in the second half.