Trump Plays the Tariff Card with Predictable Negative Economic Results

December 2, 2019

President Trump opened a fresh tariff offensive, this time against Brazil and Argentina which previously had been exempted from tariffs of 25% on steel and 10% on aluminum. He did this in response to the depreciation of those countries’ currencies and the difficulty such had exerted on U.S. farmers. But the immediate effect of his announcement today has been a dive in European and North American share prices. Tariff warfare has not promoted a reduction of the U.S. trade imbalance and instead depresses potential growth in America. If farmers believe that the tariffs are helping them, the move could benefit Trump politically in some key mid-western swing states, but the economic repercussions, as before, will be clearly adverse.

Whereas share prices had risen earlier today by 1.0% in Japan, 2.0% in Indonesia, and even 0.4% in beleaguered Hong Kong, markets are down 1.8% in France, 1.7% in Spain and Germany, 0.8% in the United States, and 0.7% in the U.K..

Risk aversion is also reflected in overnight increases of 10-year sovereign debt yields amounting so far to 8 basis points in Germany, 6 bps  in the U.S., 5 bps in the U.K., and 3 bps in Japan. West Texas Intermediate oil has climbed 1.4%. In foreign exchange trading, the dollar has faded 1.3% versus the kiwi, 0.8% relative to the Aussie dollar, 0.5% vis-a-vis the yuan, 0.6% against the euro and 0.3% vis-a-vis the yen. Increasingly, U.S. tariffs invoked in the name of a remedy to alleged currency manipulation by other governments is in fact attempted currency manipulation by the Trump administration.

Being the first business day of December, many manufacturing purchasing manager surveys were reported today.

U.S. PMIs compiled by the ISM and IHS produced conflicting findings. The more influential Institute of Supply Management report showed a disappointing a sub-50 index of 48.1 and was accompanied by drops of 1.9 index points in new business and 1.1 points in the jobs component. The IHS-compiled manufacturing PMI, by contrast, advanced 1.3 points to a 7-month high of 52.6.

Euroland’s IHS PMI rose a full index point to a 3-month high but at 46.9 remained well below the neutral level of 50. This was the 10th straight sub-50 result. Six of eight individual PMIs among euro area members were below 50 including Germany’s 44.1, Spain’s 47.5, and Italy’s 47.6. Inflationary pressure is very subdued, but some forward-looking components such as orders and business sentiment were less negative than before.

The British PMI registered at 48.9, a 2-month low. The Swiss (48.8) and Norwegian PMIs were at 2-month lows as well. Russia’s 45.6 factory PMI reflected the fastest pace of deterioration since that data series began in May 2009. Sweden’s 45.7 PMI index represents a 7-year low. Czech and Polish PMIs of 43.5 and 46.7 stayed well below 50. Turkey’s 49.5 score connoted lessening deterioration.

Turning to the Pacific Rim, the CBA-compiled Australian manufacturing  PMI dipped 0.1 point to a 42-month low of 49.9, and the Thai index sank to a 9-month low of 49.7. 14-month and 7-month highs were notched in Malaysia and South Korea, but each was below the 50 level, implying continuing, albeit slower, rates of contraction.

China’s PMI rose 0.1 point to a 35-month high of 51.8 in manufacturing, but Japan’s 48.9, though above the October reading, was again south of 50. Indonesia scored a 48.2, and the Filipino index dropped 0.7 points to a 5-month low of 51.4. India’s 51.2 showed continuing subdued growth and inflation.

In North America, Brazil’s PMI rose 0.7 points to a 2-month high of 52.9 but doesn’t reflects Trump’s decision to impose tariffs on that economy. The Canadian PMI rose 0.2 points to 51.4, a 9-month high, but Mexico’s index dropped 2.4 points to a record low of 48.0.

Swiss inflation-adjusted retail sales were 0.7% greater in October than a year earlier.

Japanese business investment in the third quarter was 7.1% higher than a year earlier but perhaps distorted by the approaching sales tax hike. Third-quarter corporate profits were 5.3% lower than in 3Q18. Motor vehicle sales posted another big on-year drop in November of 14.6%.

There were 23.6% fewer building permits in Australia in October than a year earlier.

Turkish real GDP rose 0.4% last quarter and posted the biggest on-year growth rate (0.9%) in a year. Nonetheless, that pace was down from 7.4% in the year through the first quarter of 2018.

South Korean CPI inflation rose to a 4-month high of 0.2% in November. South Korea’s trade surplus of $39.5 billion in the first 11 months  of 2019 was 39% narrower than a year earlier.

U.S. construction spending dropped 0.8% in October, their greatest drop in 10 months.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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