A federal trade court ruled last week that the Trump administration overstepped its authority when it imposed sweeping tariffs. Almost immediately, upon appeal from the White House, a federal appeals court then put a hold on that lower court order while the administration appeals the decision. Tariff policy then, remains unchanged. Well, unchanged except for the new 50% tariff on steel scheduled to take effect on June 4, which jolted markets and trade negotiations over the weekend. The EU and UK both expressed dissapointment at this latest salvo (the UK especially, who just finished negotiating with the administration and who exports over $400 million worth of steel to the US).
Unsurprisingly, markets have been whipsawed by the on-again/off-again policy. Over the weekend, Beijing and Washington traded barbs — each accusing the other of violating their trade truce, leaving investors wondering if a trade deal can actually be reached before Trump’s 90-day extension runs out.
In my view, US trade partners have little incentive to negotiate hurriedly with Washington. For one, last week’s court ruling opens the option of wait-and-see; the tariffs may go away with no negotiations needed. Second, the newly-announced steel tariffs undercuts the trade deal the UK just struck with the US; if the administration reneges on a deal just signed, why bother signing a deal at all?
We see some important data this week with job openings, the unemployment rate, and consumer credit. PMI figures will also be watched closely for insights into the economy. While manufacturing has been in contraction for years now, the services sector has only recently fallen from strong expansion to barely breakeven. A fall into contraction for services may be a negative signal.
Markets have bounced hard off of their bottom, however I believe that to be overdone. The trade war has only gotten more complicated with higher risks, yet US stocks are trading as though the trade war had never begun! That said, we may see a return to pre-“liberation day” tariff policy given last week’s court ruling. Even so, much damage has been done in the ensuing time period, and ignoring that seems foolish to me. Earnings have been good yet consumers have come under more strain, leading me to question how long strong earnings can continue. Not to mention, all of the classic recessionary signals are present: an inverted yield curve, unemployment moving higher, PMIs in contraction, and so on. Exactly how this environment should be managed is dependent on numerous factors that are specific to you, but my overall view is that downside risk currently outweighs upside risk.
Chart of the Week
This week’s chart comes to us courtesy of Reuters and it shows how companies are dealing with the added costs of tariff duties. Of interest to me is that only about 12% of companies are currently making supply-chain shifts (which is the administration’s stated goal) — 88% of companies are doing something else, such as raising prices or cutting their profits by eating the extra costs.
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