It appears the trade war is on. The Trump Administration imposed 25% tariffs on goods from Canada and Mexico, and 10% tariffs on goods from China. There is some hope a deal can be reached before they take effect on Tuesday, but that seems ever-more unlikely. It also appears the European Union may be next in the firing line.
Global markets have opened much lower today, and the US dollar has become much stronger. A stonger dollar has the opposite affect to tariffs by making US exports less appealing to foreign buyers (because their currency is weaker), and it makes importing stuff to the US more appealing (because your dollar can buy more stuff in other countries). In theory, currency strength can completely eliminate the impact of tariffs, but, of course, economies are very complex and dynamic machines so pinning down the net effect is impossible until after the fact.
Earnings are still in full swing, with about 1/3 of the S&P 500 companies having reported their earnings. So far, earnings growth has been very good, and with recent price drops, valuations may begin to make sense again. And, of course, last week was the Fed meeting. Powell’s commentary suggested that the Fed is content to keep rates where they are for the time being, and markets now expect cuts to resume in May.
Overall, I still see mixed signals. A trade war could well tip the US economy into recession, but we have yet to see how the US’s largest trading partners will respond to Trump’s recent policy actions. It could well be that this is a Trumpian negotiating tactic, and the tariffs (and trade war) disappear just as quickly as they came. In the end, I am still on recession watch, but, as I have said before, I may well shift my view if the data continues to improve.
Chart of the Week
A closer look at US trade with Canada shows that the entirety of the US’s trade deficit with Canada is due to imports of oil & gas. Factoring that out, the US exports more to Canada than it imports, when measured as a percentage of the Canadian economy. What’s more, when measured as a percentage of the US economy, trade with Canada has been mostly balanced, currently standing at less than half a percent of the total economy.
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