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The latest escalation of the US-China trade war increases the chances of the US economy slipping into recession – and the Federal Reserve will try to curb it by further cutting its rates. 39; interest.
President Donald Trump on Friday called on US companies to find alternatives to China, following a new round of Chinese tariffs on $ 75 billion worth of US goods, including automobiles.
Trump sparked an angry tweet against China, shortly after criticizing Fed President Jerome Powell again, who delivered a measured speech at the Fed's annual Jackson Hole symposium on Friday morning. Powell left the door open for further rate cuts, but he did not go so far as to promise, which clearly disappointed the president, as well as some market professionals who wanted a more dovish Fed.
Trump, in a pair of tweets, criticized Powell for his lack of action, and asked who is a bigger enemy, the president of the Fed or the president of China?
Trump then tweeted that the United States did not need China, that China was flying to the United States, and that US companies were "required" to look for alternatives. Treasury yields slipped and equities sold, with companies involved in China being among the hardest hit.
"The Chinese retaliation clearly shows that they are not progressing in the negotiations for an agreement, and the president has once again taken up the challenge.They are shooting at one another against each other. At this point, the chances of a recession are much higher – it's very close, "said Mark Zandi, chief economist at Moody's Analytics.
When the Dow lost 2% Friday afternoon, the 2 to 10 year yield curve flattened and briefly reversed. A reverse yield curve, in which investors look for more return on short-term securities, is a relatively reliable recession warning.
"These are moments of risk that we believe to mean further tightening of financial conditions and increased spikes and volatility, which tend not to be useful," said Michael Gapen, chief US economist at Barclays . "This increases the amount of insurance that the Fed needs to put in place to support the economy."
Gapen said Powell could do more easing when he spoke on Friday and that there was more risk since the Fed meeting in July, including there. including events in Hong Kong and risks related to Italian politics. But the overriding concern that he mentioned was the commercial uncertainties.
"I think the Fed was willing to relax its efforts in September, so it locks things in. I suppose if the situation gets bad enough we ask them to do 50 basis points instead of 25," Gapen said.
Art Hogan, chief market strategist at National Securities, said tensions have intensified, creating an even more uncertain level for the markets. "It's almost as if the administration was waiting for the Fed to announce a rate cut at the Jackson Hole meeting. And as Powell has not kept his promises, he went to def-com 5, "said Hogan.
Historically, the Fed does not act during its annual Jackson Hole retreat.
Gapen said the trade war is hurting global trade revenues. For the United States, exports account for about 15% of GDP, but for other countries the contribution is about twice as large. Trade problems are affecting economies around the world, and Germany, for example, has experienced a modest contraction in growth, while the United States is still growing at around 2%.
"The risk is that it gives you the illusion that the US economy will be fine," Gapen said, adding that it was a question of how long the US could avoid a downturn.
Citigroup's global economist, Cesar Rojas, said it was possible that Trump's tweet threats were a forerunner of a much more intense phase of trade wars, which would be even more prejudicial to both economies.
"It seems to me that it will finally announce that tariffs on China will be increased and that companies will have maybe six months, if not a year, before these tariffs will come in." reach these levels, or even trade with China are blocked, "said Rojas. .
Economists have said that Chinese tariffs and Trump's comments on Twitter increased the level of uncertainty of US companies, which have already limited their spending.
"I think companies are already at the forefront," Zandi said. "If the president insists, he will go beyond the limit, it will be too hard to bear, they are now sitting on their hands, but if the president goes much further, they will start cutting and laying workers. Is the recession.The manufacturers are already in recession ".
The IHS Markit Purchasing Managers' Index revealed Thursday that the manufacturing sector in the United States was in contraction in July, for the first time since the financial crisis. A weakening of the services PMI showed that the slowdown in the manufacturing industry could expand, but the services PMI remained above 50, which means expansion.
According to Zandi, Moody's Analytics has an indicator of daily recession ratings based on financial data, such as credit spreads and stock volatility. The indicator shows a recession probability of 45% over the next 12 months. This includes measures of the yield curve, so it's increased, the curve being reversed this week.
"What we are seeing now is that both economies will suffer," said Rojas. "Basically, our situation in the US economy lies in the fact that external factors are already weighing on the manufacturing sector and agriculture." He said the manufacturing PMI confirmed that the US would become more sensitive to tariffs and trade wars.
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