The Daily Update - US tariffs and employment, and China

An exciting day for asset markets started with a risk-on tone as the UK woke up to the news that Trump and Kim Jong-Un are eager to meet in May; in what could be a milestone meeting where amongst many items, denuclearisation will be a hot topic. Ahead of that announcement, Trump officially went through with his “very flexible” 25% steel and 10% aluminium tariffs, highlighting regional allies, or as Trump refers, “real friends” Canada and Mexico as currently exempt; a change in tune then? The tariffs, which will take effect in the next couple weeks could “go up or down, depending on the country”, with Trump adding that countries could be dropped and added.

Elsewhere, China’s trade data released early yesterday morning, surprised to the upside, with exports up 44.5% (versus expectations for +11%, in dollar terms) and the trade balance beat the market’s deficit expectations at USD 33.74bn surplus. Importantly, China's trade surplus with the US jumped to ~USD21bn, which is the highest reading ever recorded in a February. So China could be one of those countries where tariffs could potentially “go up”.

At the opening of China's NPC, on Monday, Premier Li Keqiang did not appear to respond directly to the tariff threat, however, he did mention that China would protect its interests and would look to open up its markets and reduce caps on foreign investment. China’s Foreign Minister Zhang Yesui did, however, say earlier this week that “China does not want to fight a trade war with the US, but we absolutely will not sit by and watch as China’s interests are damaged”.

China is by far the largest producer of the aforementioned commodities, accounting for ~50% of total crude steel and aluminium production, as of last year’s numbers. However, as China is the largest consumer of its total production, with exports at only ~23% and ~11% of total global exports, respectively, we are not sure these tariffs will have a material impact on China’s growth and trade balance. In fact, as we have previously noted, China’s steel and aluminium exports to the US have fallen to 0.2% of China’s total exports, which is immaterial in the larger scheme of things. The vice secretary-general for the China Iron and Steel Association said, “The impact on China is not big,” adding, “Nothing can be done about Trump. We are already numb to him.” Even if this order is not a direct attack on China, the bigger risk to the US is that it could alienate itself (note the EU’s retaliatory comments), while China garners even further international presence as it opens up its markets and reduces caps on foreign investment.

We also had a mixed bag of US employment readings for February, a strong non-farm payroll print showed that 313k jobs were added (consensus +205k) with an upward revision in January, but the unemployment rate remained at 4.1% (consensus 4.0%), and the participation rate increased to 63% (from 62.7%). However, of more importance is the change in average hourly earnings as inflation remains on everyone’s minds; the month-on-month reading disappointed at only 0.1%, and missed at 2.6% yoy, down from January’s reading. It is clear to investors that the US labour sector is tight, so market focus is on the Fed and its tightening cycle, and just how ‘gradual’ it will be if inflation does, in fact, pick-up; after all, wages drive core inflation. The previous average hourly earning number, at 2.9% in January (revised down to 2.8% today), was the highest reading since 2009, and the subsequent market sell-off was a result of increased upside inflation risks, thus further Fed tightening concerns. However, during his testimony last week, new Fed Chair Jerome Powell stated that wages do not appear to be causing any upside risks as yet, adding that a gradual approach to normalising would be maintained. There is a near certain chance of a hike on March, 21, and the market is almost fully pricing in a third hike for 2018.

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