International Tensions Over Trade Deepen

January 24, 2018

Former U.S. Secretary of Treasurer Robert Rubin famously said in 1995 that a “strong dollar is in the best interest of the United States” because it promotes price stability, lowers interest rates, and attracts productive foreign capital. That thinking went on to characterize U.S. policy for more than 20 years until the election of President Trump. The 180 degree turn in government policy was today underscored at the World Economic Forum when the current Treasury Secretary Steven Mnuchin said a weaker dollar benefits growth and Commerce Secretary Wilbur Ross asserted that the U.S. is indeed in a trade war.

The protectionist predisposition of the Republican-controlled U.S. government has a potential to destabilize financial markets. In overnight trading,

  • The dollar tumbled 1.3% against sterling and lost another 0.9% against the Swiss franc and peso, 0.8% versus the yen and loonie, 0.7% relative to the kiwi and euro, and 0.5% vis-a-vis the yuan.
  • Japan’s Nikkei closed down 182 points or 0.8%. Stocks also fell 0.9% in Taiwan and 0.3% in Indonesia and show losses so far of 0.5% in Great Britain, 0.2% in France and 0.1% in Germany.
  • Consistent with Rubin’s warning about a weak dollar’s effect on interest rates, the yields on 10-year British gilts, U.S. Treasury futures and German bunds rose 5, 4, and 3 basis points, while the 10-year Japanese JGB moved a basis point higher today.
  • There’s been upward pressure on commodity prices. Gold and copper are up 1.2% and 1.0%, while WTI crude oil firmed 0.4%.

Japan’s trade surplus paradoxically contracted last year. The customs clearance surplus fell 25% from JPY 3.99 trillion in 2016 to JPY 2.99 trillion last year as import growth of 14.0% exceeded export growth of 11.8%. The seasonally adjusted JPY 87 billion surplus in December when imports rose more than three times faster on month than exports followed a JPY 290 billion surplus in November. December exports to the United States were just 3.0% greater than a year earlier, whereas imports of U.S. goods recorded on-year growth in the month of 7.5%.

Euroland experienced its best growth in years last quarter, and preliminary purchasing manager survey results for January indicate that momentum intensified further in the new year. Euroland’s composite PMI increased 0.5 points to a 139-month high of 58.6. In spite of some deceleration in factory activity, quickening service-sector activity suggest that real GDP could possibly advance 1.0% not annualized in the first quarter of 2018.

  • The French composite PMI rose to 59.7, a 2-month high and 5.6 points higher than the January 2017 reading.
  • The German composite PMI edged down 0.1 point from December’s 80-month high of 58.8 but, at 58.7, was 3.9 points better than the year-earlier level.
  • Today’s findings also revealed faster growth in jobs as well as an intensification of input price inflation.

British December labor statistics highlighted the lowest rate of unemployment since 1975 (4.3% in 4Q), the best employment rate (74.5%) since at least 1971, and yet continuing subdued wage growth of 2.5% overall in September-November (2.4% for regular pay that excludes bonuses).

Between end-2016 and end-2017, producer prices increased 3.0% and 1.8% in Finland and Spain, respectively. In both cases, there was significant deceleration from November.

Malaysian and South African consumer prices rose 3.5% and 4.7% on year in December.

Consumer sentiment in the Czech Republic jumped 2.3 points to a record high reading of 112.3 in January. The business climate index, however, settled back to 96.9 following readings of 97.5 in December and 96.7 in November.

U.S. existing home sales data and the FHFA house price index will be reported later today.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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