Daily Commentary BY THE CURVE TEAM –

Concerns Over Trade War Fallout Grow

19th of July, 2018

Federal Reserve Chairman Jerome Powell did his best to remain positive and focus on the Fed’s central outlook for the US economy in the second day of his appearance in front of Congress. Despite his best efforts it was the risk to the outlook that received the most air time with those same risks evident in the latest beige book from the 12 Federal Reserve Districts.

Despite his best efforts to keep the focus on the current strength of US economy and the positive outlook, markets chose to focus on the downside risks, especially the fallout from the trade war, that could have a material negative impact on the outlook.

In speaking on the potential fallout from the escalating trade war, Powell said that “lots and lots of individual companies have been harmed by this. We don’t see it in the aggregate numbers yet because it is a $20 trillion dollar economy and these things take time to show up.” 

While it hasn’t showed up in the data, the trade war is already impacting businesses decision making with Powell saying “we hear many, many stories of companies that are concerned and are now beginning to make investment decisions, or not make them, because of this.”

The kicker which exasperated the market’s focus on the downside risks was the comments on the impact of the trade war from the beige book report from the 12 Fed districts. All 12 reported a negative impact with the report saying that “Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions they attributed to the new trade policies”

Not helping the situation when it comes to trade negotiations were comments from President Trump’s National Economic Council Director, Larry Kudlow. In comments overnight, Kudlow got personal and names the Chinese President Xi Jinping as the one holding up the negotiations saying that “So far as we know, President Xi, at the moment, does not want to make a deal”.

It follows moves by the Chinese media agencies to refrain from making the situation personal by not referring directly to President Trump in news reports.

Finally if you want to know what the Chinese think, the Chinese Foreign Ministry said yesterday that “the U.S. trade war is not just with China but with the rest of the world. By regarding the rest of the world as adversaries, the U.S. has dragged the entire global economy into a place of danger.” 

The global trade war remains the biggest risk to the international outlook and is unlikely to go away any time soon. Today though we get an important update on the domestic outlook with the latest employment data scheduled for release.

David Flanagan

Director - Interest Rate Markets