Deepening Trade War Concerns

March 20, 2018

The Fed’s two-day policy review starts today. The first post-meeting press conference of the Jay Powell era and a likely 25-basis point interest rate hike  are tomorrow, and investors are anxious to see if there is a signal that four increases this year are more likely than two or three.

But all this has been overshadowed by deepening concerns about a coming U.S.-led global trade war. President Trump is expected to unveil a package of tariffs very soon against imports from China totaling around $60 billion. The President has also been making bolder public criticisms of the Mueller investigation, which is fanning speculation that he is poised to fire the special prosecutor. 

Data released today in Japan (index of leading economic indicators) and Germany (investor sentiment) revealed less rosy conditions. British inflation and Australia’s housing market have cooled. Minutes from the last Australian monetary policy review were published, and central banks in Colombia and Chile are currently holding monetary policy reviews.

Yesterday’s big stock market losses has not been followed by a rebound. Share prices closed down 0.5% in Japan, 0.4% in Australia, 0.7% in Indonesia, and 0.3% in Taiwan. Equities show losses of 0.3% in Greece and 0.1% in both Spain and Switzerland. Rises of 0.4% in the U.K., 0.3% in Germany and 0.2% in France look fragile.

The dollar firmed overnight by 0.4% against the yen and kiwi, 0.3% versus the euro and Swissie, and 0.1% relative to the peso, Australian dollar and sterling. The loonie and yuan are flat.

West Texas Intermediate crude oil advanced 1.1% overnight, but gold and copper are 0.4% softer.

Germany’s ZEW expectations index, a gauge of investor sentiment, dropped to an 18-month low in March of 5.1 from readings of 17.8 in February and 20.4 in January. The strong euro and trade war risks seem responsible for this deterioration, although it’s also probable that the ECB will end quantitative stimulus after September. An ECB rate hike around mid-2019 is also being speculated. The German ZEW index of perceived current economic conditions fell to 90.7 in March from 92.3 in February and 95.2 in January.

German producer price inflation declined 0.3 percentage points to a 14-month low of 1.8% in February, having crested at 3.1% last September. The energy component also posted a 1.8% on-year increase.

As Germany goes, so goes the euro zone, whose ZEW expectations index slumped to 13.4 in March from 29.3 in February and 31.8 in January.

Japan’s index of leading economic indicators in January slipped to a 5-month low of 105.6. Although the index of coincident economic indicators dropped even harder to 114.9 from 119.7, government officials retained a trend assessment on such of “improving.” That’s been the designation since October 2016.

On-year growth in Japanese machine tool orders slowed to a six-month low of 39.5% in February.

After back-to-back readings of 3.0%, British CPI inflation decelerated in February to a 7-month low of 2.7%. Core CPI inflation also dropped 0.3 percentage points, settling at 2.4%. Retail price inflation of 3.6%, producer output price inflation of 2.6%, and producer input price inflation of 3.4% were each also below January readings. Likewise, house price inflation according to the formerly known DCLG-compiled index slid below 5.0% to 4.9% in January.

There was nothing surprising in the Reserve Bank of Australia minutes. Officials seem to be still comfortable with the record low Official Cash Rate of 1.5%. Despite an improved global economic environment, a still-elevated Aussie terms of trade, and economic growth that should somewhat surpass Australia’s potential this year, the drop of unemployment and rise of inflation is proceeding only gradually, and wages are pretty pressure-free. House price inflation in Australia slowed to 5.0% in 4Q17 from 8.3% in the third quarter.

Quarterly government economic forecasts were published in Switzerland. Projected GDP growth was bumped up marginally to 2.4% this year and 2.0% in 2019, Projected CPI inflation was raised to 0.6% in 2018 but left at 0.7% for next year. Separately, released data showed a tripling of the Swiss trade surplus between January and February to CHF 3.2 billion in the latter month.

Turkish consumer confidence fell a point to 71.3 in March after readings of 72.3 in each of this year’s first two months, but Danish consumer sentiment remained steady this month. Consumer sentiment in New Zealand had slumped 4.4% in the final quarter of 2017 in response to that country’s election result but recouped most of that drop this quarter with a 3.5% rebound. At 111.2, the latest score is not very different from the reading of 111.9 in the first quarter of 2017.

South African CPI inflation slowed 0.4 percentage points to a three-year low of 4.0% in February. In the same 12-month interval, consumer prices in Hong Kong rose 3.1%, and South Korean producer prices went up 1.3%.

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

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