Our trade ‘spat’ with China escalates

Last week was perhaps the most highly anticipated week of the year with the U.S./North Korea summit, the Federal Reserve hiking short-term interest rates, the U.S. releasing its list of Chinese products subject to tariffs, and China stating they will respond with tariffs of equal scale. One normally would have expected tremendous stock volatility, but stocks were calm.

On Friday, President Donald Trump announced the list of tariffs (or, taxes) on $50 billion of Chinese goods, which target technology products. The first round of $34 billion go into effect on July 6, and the tariffs on the remaining $16 billion of goods are under review.

China immediately responded with retaliatory tariffs of equal value, targeting U.S. agricultural products (such as soybeans) and automobiles to also be imposed on July 6. The markets seem to be accepting these tariffs as part of a negotiating strategy that will eventually end with a comprehensive deal. Regardless, this raises the risk of the current trade “spat” escalating into a full-blown trade war.

Also last week, The Federal Reserve (Fed), our nation’s central bank, raised short-term interest rates for a second time this year by increasing them 1⁄4 of a point to a range of 1.75-2.0%. The Fed signaled that a September hike is very likely; and according to Bloomberg, there is about a 75% chance of a hike in December.

The Fed’s economic outlook was positive, as its forecasts showed increasing economic growth, a falling unemployment rate, and modestly rising inflation.

Economic data last week was mixed with inflation data mostly in line with expectations, manufacturing data slightly disappointing, and retail sales surging higher. The retail sales data is the most important since spending by you, the consumer, accounts for 70% of the total U.S. economy.

The Simply Money Point

Markets are likely to stay focused in the short run on trade with China, meaning you should expect some stock turbulence over the next few months. However, the U.S. economy is still on very solid ground with most economists expecting growth around 3% in 2018.

This economic growth will help lift corporate earnings, which have historically been the most important driver of stock prices over the long run.


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