June 21, 2018
U.S. Growth Is ‘Close to a Peak’, But Risks Are Mounting
The U.S. economy is booming this quarter as tax cuts power consumers and businesses. Yet risks are mounting that the high will be short-lived. The housing market is struggling to build on its progress thanks to supply constraints and soaring property values, with data Tuesday showing an unexpectedly large drop in construction permits. Manufacturing is coming off the boil amid lengthening order backlogs and accelerating input prices, particularly for oil and partly due to tariffs on metals. On top of that, President Donald Trump has brought the U.S. to the verge of a trade war with China that could see levies on hundreds of billions of dollars in goods. It all amounts to increasing headwinds on economic growth that has a fair shot this quarter at reaching 4 percent, the fastest since 2014. While the Trump administration said such strength makes it a good time to tighten the screws on U.S. trading partners, especially China, markets gave a less-sanguine judgment on Tuesday, and economists caution that prolonged pain from trade will complicate the path for companies and consumers. With the U.S. economy about to enter the 10th year of expansion — a time where growth typically faces hurdles in reaching new heights — any slowdown would arrive just as the rest of the world shows signs of losing steam. U.S. growth “is close to a peak” and momentum will be “cooling from here,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York. The trade risks “come at a point when the economy itself is in the late stage of the business cycle, it’s already close to capacity, where you can’t easily substitute for imports, and businesses are worried about trade tensions.” The U.S. pledged Friday to push ahead with tariffs on $50 billion of Chinese imports. Trump delivered another jolt on Monday by asking the administration to identify $200 billion in Chinese products for additional tariffs of 10 percent, plus another $200 billion after that if the Asian nation retaliates. Beijing vowed to respond “forcefully” to Trump’s latest move. Further clouds arrived in U.S. data showing mixed progress on housing in May.
EU Retaliation Against U.S. Over Metal Tariffs to Start June 22
The European Union triggered the first phase of retaliation against the U.S. over its metal-import tariffs imposed on national-security grounds, making good on more than three months of threats to hit American goods with tit-for-tat levies. The European Commission in Brussels gave final approval for a 25 percent duty on 2.8 billion euros ($3.2 billion) of EU imports of a range of U.S. products including Harley-Davidson Inc. motorcycles, Levi Strauss & Co. jeans and bourbon whiskey. A separate 10 percent levy is being applied to U.S. playing cards imported into the bloc. The duties, due to be published in the Official Journal on Thursday and to take effect on Friday, are a response to U.S. tariffs of 25 percent on steel and 10 percent on aluminum that the EU says are pure protectionism masquerading as national-security policy. “We did not want to be in this position,” European Trade Commissioner Cecilia Malmstrom said in a statement on Wednesday. “However, the unilateral and unjustified decision of the U.S. to impose steel and aluminum tariffs on the EU means that we are left with no other choice.” The EU countermeasures cover a total of around 200 categories of U.S. products also including various types of corn, rice, orange juice, cigarettes, cigars, t-shirts, cosmetics, boats and steel. The EU is reserving the right to target more U.S. products with further duties no later than March 23, 2021. Second-stage retaliation would involve levies ranging from 10 percent to 50 percent on an extra 3.6 billion euros of American goods imported into the EU.
Italian Bonds Hit by Double Whammy of Euroskeptic Appointments
Italy’s bonds slid with the appointment of two euroskeptics to key posts in the Italian parliament, reigniting investors’ concerns over the populist government’s policy. Shorter-dated bonds fell the most, with the selloff coming after the securities had recovered ground this month as Finance Minister Giovanni Tria has pledged Italy’s commitment to the single currency. The decline picked up pace after early losses sparked by bond supply from Spain. The Italian Senate picked euroskeptic economist Alberto Bagnai, author of two books advocating the dismantling of the European monetary union, as head of the finance committee. Claudio Borghi, a top economic adviser for the coalition partner League, was named the head of the budget committee in the lower house. The populist government program doesn’t include any reference to a possible option for a euro exit. “There are a couple of high caliber League euroskeptics getting appointed to important parliamentary jobs in Italy this morning: Borghi and Bagnai,” said Antoine Bouvet, an interest-rate strategist at Mizuho International Plc. “The fact that they get roles that have to do with finance and budget has been understood by the market as a sign that the league intends on pushing its anti-euro ideas.” Two-year yields rose 19 basis points to 0.78 percent, the highest since June 14, while 10-year yields rose 13 basis points to 2.69 percent, set for their biggest advance in two weeks. The yield spread over equivalent German bunds widened 17 basis points to 234 points, after dropping to a two-week low earlier this week.
China Accuses U.S. of Trade ‘Abuses’ as India Hits Back at Trump
Global trade tensions deepened Thursday with China reiterating it will hit back if the latest tariff threats from Donald Trump materialize, while India followed the European Union in slapping retaliatory levies on U.S. goods. China is “fully prepared” to respond to any new list of U.S. tariffs, according to a commerce ministry spokesman, who said the nation will use a combination of quantitative and qualitative measures. Trump on Monday evening ordered up identification of $200 billion in Chinese imports for additional tariffs of 10 percent — with another $200 billion after that if Beijing retaliates. India raised tariffs on a slew of items in retaliation for the U.S. imposing higher levies on some products shipped from the South Asian nation, echoing steps taken by China, the European Union and other trading partners. The import duty on chickpeas and bengal gram, or chana, has been increased to 70 percent and will take effect from Aug. 4. The benchmark Chinese stock index sank 1.4 percent on Thursday, falling for fifth day out of the last six, and other emerging markets also declined, while the dollar strengthened. “If protectionism cements its role in one or two big nations, we will see massive reallocation of resources in an inefficient way,” said Raymond Yeung, chief greater China economist for Australia & New Zealand Banking Group Ltd. in Hong Kong. “World growth will be affected.” The world’s most-powerful central bankers this week warned that escalating international trade tensions have started damaging confidence among companies, threatening the global economic expansion. Case in point: Daimler AG late Wednesday slashed its earnings outlook for the year, saying fewer Chinese consumers will buy Mercedes-Benz SUVs because of tariffs Beijing is slapping on autos imported from the U.S. “Changes in trade policy could cause us to have to question the outlook,” Federal Reserve Chairman Jerome Powell said during a panel discussion at a European Central Bank conference in Sintra, Portugal. “For the first time, we’re hearing about decisions to postpone investment, postpone hiring.”