Tariff Threats Trigger US Market Sell-off

Stockholm (Ekonamik) – This week was dominated by threats from President Trump to impose 5% tariff on all Mexican products from June onwards, increasing them by 5% each month to peak at 25% by October 1st if his immigration concerns are unresolved. Trump threats being what they are we advise caution, but financial markets reacted very badly to the news. The S&P500 market index fell 1,32% and the US Treasury yields both fell and closed the trading sessions even more inverted on Friday, May 31st. Foreigh exchange markets also reacted. “The peso has responded most forcefully, dropping 2.6% today, a move which would alone counter much of the first round of potential U.S. tariffs,” according to Douglas Porter, CFA, Chief Economist at BMO Capital Markets.

Given the clearly dangerous implications of this threat, one might be forgiven for thinking the USA was resiliently facing no dark clouds over its economic horizon. According to the US Bureau of Economic Analysis (BEA), GDP growth for the USA in the first quarter was estimated at 3.1%, down from 3.2% from the advanced estimate published at the end of April. Although the revision is small, the prospect for the ongoing quarter is quite bleak, in comparison. As of May 24th, the latest estimate GDP growth for the second quarter of 2019 from the Atlanta Fed’s GDPNow was of 1.3%, having floated between 0.9% and 1.7% since April 29th.

“The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month,” the BEA press release explained. “Today’s estimate reflects downward revisions to nonresidential fixed investment and private inventory investment and upward revisions to exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, were revised up; the general picture of economic growth remains the same.”

Asides from the headline GDP revision and the forecasted GDP decrease for the second quarter, BMO Capital Markets noted that there were at least five other pieces of bad data news for the USA. The goods trade deficit widened to US$72.1 billion in April according to advanced figures. Pre-tax corporate profits seem to have preliminarily slowed to +3.1% on a year-on-year basis in the first quarter of 2019. Pnding home sales were down 1.5% in April, the University of Michigan Consumer Sentiment was also revised down to 100.0 in May while initial jobless claims were up by 3,000 to 215,000 for the week of May 25.

As we have been discussing since the beginning of the year, the prospects for the USA economy over the next 12 months are not very good. This gloomy mood has recently resurfaced. “As it enters the record books for longevity, the U.S. expansion seems to be losing steam,” noted Michael Gregory, CFA and Deputy Chief Economist and Sal Guatieri Senior Economist at BMO at the end of May.”Trade policy headwinds are mounting just as the tailwind from past policy stimulus has ebbed.” According to the two economists, “of the key economic drivers, only consumers look to have enough fuel in the tank to propel the economy at an above potential rate this year. The rest of the economy will likely prevent GDP from reaching its long-run speed limit, and we expect growth to average a modest 1.6% to the end of 2020.” However, this forecast is conditional on how the trade war unfolds: “a further escalation in trade tensions would grind down this modest pace, pushing the jobless rate higher.”

Sometimes, listening to President Trump talking about the economy really does feel like watching a blind man boastingly making his way to the edge of a precipice.

 

Editor’s note: In our calendar of events we mistakenly reported that 2nd Quarter GDP would be published this week. We apologise for this mistake. The relevant publication was the one discussed above. The mistake was entirely ours. 2019 second quarter GDP figures are only sceduled to be released on July 26th.

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