Markets witnessed a rollercoaster week as trade war concerns ramped up; the yield on the 10-year UST was marginally unchanged, although the curve continued to flatten. The US announced a further USD 200bn worth of Chinese imports on which it wishes to impose 10% tariffs; subject to public consultation by the end of August. Calling the new list of tariffs “totally unacceptable” bullying, China vowed once again to retaliate; with the US touting a total of USD 500bn worth of Chinese goods to be subject to tariffs, China may struggle to fight back with the same magnitude, as it only imports ~USD150bn from the United States. Fortunately, China has sufficient firepower to deploy to stabilise growth and the renminbi. The good news on Friday came from the strong trade report, where Chinese exports bounced more than expected and imports remained robust; suggesting both external in domestic demand remain strong. China’s trade surplus also beat expectations, almost doubling; its surplus with the US jumped to record highs, this could add further fuel to Trump’s trade agenda.
The dangerous consequence of the US administration’s decision to embark on this course of action is that it could easily lead to another financial collapse and world leaders will need to think quickly about how to avert this. A slowdown in consumer spending would likely go hand in hand with a slowdown in economic growth and investors are likely to respond by taking capital home. Creditor nations like Japan tend to see their currencies appreciate under those circumstances and whilst the euro faces difficult challenges with Brexit and the huge indebtedness of the periphery, the euro is likely to gain too. As those two currencies are major components of the RMB basket then the renminbi is likely to strengthen too. We believe that further escalation of the trade war by the Trump administration risks a slowdown in consumer spending and with the Fed still in tightening mode, creates the conditions under which the world suffers another global recession and an accompanying global financial crisis.
In terms of Fed rhetoric, Chair, Powell upbeat in regards to the US economy and inflation trajectory, however, warned of the effects to growth of aggressive trade policies. We will hear more from Powell on Tuesday as he presents his views on the US economy in front on Congress. Meanwhile, US Core CPI came in bang on forecast at 2.3% yoy. Headlines were focused on Trump’s travels and the latest NATO Summit where a “very happy” Trump held a press conference confirming he can now “believe in NATO” whose members have committed to “up spending [by] $33bn” with a commitment from a “very unified and much stronger” Alliance to swiftly meet the NATO 2% of GDP spending target. Agreeableness does not a dealmaker make.
This week kicked-off with China’s activity data, which remained robust in June and the Q2’18 GDP print came in-line with expectations at 6.7%; well above the ‘around 6.5%’ government target. Today Trump and Putin are holding their first summit, and China’s Premier Li will co-host the China-EU summit alongside EC President Tusk. Data wise the US will release its retail sales and Empire Manufacturing readings, and the US housing print may grab some attention. As mentioned Tuesday’s focus will be on Powell’s testimony. Brexit chatter and US IP may also garner some market attention. The US beige book and housing starts will be released on Wednesday, and Powell is due to appear in front of the House Financial Services Committee. On Thursday, the U.S. Commerce Department will begin its two day investigations into whether auto imports pose a threat to national security; following the touted 25% tariffs. UK retail sales release on Thursday will be watched closely as market expectations are for further softening in June. A relatively quiet day, will see the Japan CPI reading for June and the Fed’s Bullard speak on monetary policy and the US economy.