Confidence Rises Among Lower-Income Americans Economic confidence among lower-income Americans has taken a recent leap, the latest evidence that benefits of the economic expansion are reaching a broader swath of workers.
(…) In the University of Michigan’s consumer-sentiment index, confidence among households in the bottom third income tier has risen 11.4 points since February, an IHS Markit analysis of sentiment figures shows. Meanwhile, sentiment among Americans in the highest third of incomes has fallen more than eight points. (…)
Federal Reserve Bank of New York’s June 2018 Business Leaders Survey
The survey’s headline business activity index climbed seven points to 21.4, its highest level in more than a decade. The business climate index increased nine points to 21.0, a sign that firms, on balance, regarded the business climate as better than normal. The employment index moved up five points to 17.7, indicating a moderate increase in employment levels. The wages index, while down three points from last month, remained elevated at 41.1, reflecting ongoing wage growth.
The prices paid index climbed ten points to 62.4, a multiyear high, suggesting ongoing widespread input price increases, and the selling price index held steady at 22.3, a level pointing to ongoing moderate increases in selling prices.
The capital spending index was little changed at 12.7, suggesting that capital spending continued to increase moderately.
The indexes for future business activity and future business climate were both little changed, at 36.6 and 20.8, respectively. Indexes for future wages and prices also held steady, and the index for planned capital spending edged down for a second consecutive month, to 22.6.
Tariffs Start to Ripple Their Way Through U.S. Economy Effects are like a tax increase, very small at this point, but reducing real GDP and eroding real wages
(…) The index for laundry equipment in the Labor Department’s consumer-price Index, the nation’s main gauge of inflation, shot up by about 17% over the past three months. (…)
As of mid-2017, there were 29,288 steel-consuming firms, employing over 900,000 workers who face higher prices versus just 916 steel-producing firms with 80,000 employees who benefit from those higher prices and reduced competition.
Despite being a direct beneficiary of the washing-machine tariffs, Whirlpool Corp. is also a metal consumer. Its stock price jumped about 12% when the washing-machine tariffs were announced but is down 18% since. In its first-quarter earnings call in April, Whirlpool said the steel and aluminum tariffs would cost the company an extra $50 million. (…)
The effects remain muted because tariffs, so far, still affect only a small portion of the roughly $3 trillion a year in imports that the U.S. is on course to bring in this year. U.S. imports are about 15% of gross domestic product, compared with a world average of 28%, according to World Bank data. In other words, despite running by far the world’s largest trade deficit, the U.S. economy is less reliant on trade than most nations. (…)
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Trade war = slower earnings growth
(…) At this juncture, it is important to keep in mind that tariffs imposed by the U.S. and China cover about 12% of two-way trade between the two countries (U.S. imports about $500 billion and exports about $130 billion to the middle kingdom). The trade spat would be quite manageable for the global economy were it not for Mr. Trump’s threat to target another $100 billion of Chinese products if Beijing does indeed levy tariffs on U.S. products on July 6.
So it’s getting a lot more complicated on the geopolitical front at a time where the Federal Reserve is still inclined to hike a few more times in 2018 despite a stronger USD. This is a combination that could pose a challenge to earnings growth and equity markets given that PE expansion is very hard to come by at this point in the economic cycle. (NBF)
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Trade War Escalates. What’s Next?
(…) For Trump, who has bellowed primitive views on trade for decades, tariffs are not a pacifying feint. They are the main punch. Moreover, precisely because they carry no visible economic cost—and because, for wholly unrelated reasons, the US economy is gaining steam relative to the rest of the world—Trump is likely to conclude that his protectionism is “working”, and will double down.
This could take the form of the threatened tariffs on cars and car parts (on the same absurd “national security” pretext used for steel). These would hit up to US$208bn of car imports alone, and perhaps US$60-100bn in parts. If these went into effect along with all the other actual and threatened tariffs mentioned above, the (notional) US effective tariff would rise to 6.7% [from 1.4%], the highest since 1969. And a share of dutiable imports, tariffs would be 21%—the highest since 1946.
A bigger concern is withdrawal from Nafta. This would change the long-run trade-liberalization trend from neutral to reverse. Given the inability to nail down a deal so far, the likelihood of anti-trade populist Andres Manuel Lopez Obrador winning Mexico’s July 1 presidential election, and Trump’s need for a flag to rally his base for the November 6 midterms, Nafta withdrawal is a non-trivial possibility.
(…) Given that Trump seems to be taking ever more personal control over trade policy, the risk that he spends the rest of this year escalating his trade war on all fronts cannot be ignored. (Gavekal)
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Trump Threatens New China Tariffs as Trade Tensions Rise President Donald Trump launched a pre-emptive strike in the trade conflict with China, directing his aides to identify $200 billion in Chinese goods for new 10% tariffs—in case Beijing retaliates against the tariffs the U.S. imposed earlier this month.
(…) According to data from the International Monetary Fund, the US accounts for around 13.6% of global imports of goods and China for about 10.4%, the two largest country shares globally. Therefore, and given the global integration of manufacturing supply chains and international links between financial markets, the credit effect of the US and Chinese actions will reverberate across firms and sectors in many countries.
(…) If trade policy uncertainty and financial market volatility also weaken consumer and corporate sentiment, the second-order impact of tariff increases would be to dampen currently robust global growth momentum. (…)
Given the very large size of both economies (with 2017 GDP of $19.4 trillion for the US and $12.2 trillion for China), tariffs on $50 billion in traded goods do not have a meaningful direct effect on growth in either country. Nonetheless, firms that produce or use the products targeted by the tariffs will feel the effect. The direct impact on exporters will depend on whether the goods are price-sensitive or not, and whether they can find alternative markets for them. The impact on firms that use targeted products as inputs will depend on whether the goods can be sourced from other suppliers. States and local regions that have a concentration of sectors targeted by tariffs could also suffer.
The tariffs may raise the price of the targeted products in the importing country and depress prices elsewhere, including in the exporting country. Whether they impact overall inflation will depend on the conjuncture of several different factors. The tariffs may also lead to inefficient allocation of resources and overproduction in some sectors.
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Strange Bedfellows: Trump Trade Fight Brings Japan and China Closer Japanese Prime Minister Shinzo Abe, after years of skirmishing with China over territory and security, is now promoting a rapprochement with Beijing that reflects Tokyo’s need for allies in upholding the postwar free-trading system amid President Donald Trump’s tough line on trade.
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EU Pursues Trade Talks With Australia
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India counters Trump tariffs, to hike duty on US bikes, almonds, apples
CHINA SLOWING
The June SMI manufacturing index reflects moderating economic activity. (The Daily Shot)
EARNINGS WATCH
Corporate guidance is on watch as it could be the first indication of margins squeeze amid rising wages and other operating costs, interest rates and tariffs. So far, so good as this Bianco Research chart (via The Daily Shot) illustrates:
EARNINGS MATTER
(Hedgopia)
WE KNOW THIS WON’T END WELL
Source: Piper Jaffray (via The Daily Shot)
BRUISED SHORTS
Tough to be a short seller these days. Trumps tax reform is strongly encouraging M&A. Rent-A-Center (65% short interest) just received a takeover offer while Gamestop (44%) jumped almost 20% after Reuters reported that the consumer electronics retailer is receiving buyout interest from private equity firms, including Sycamore Partners. (Grant’s)
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