Stocks tumbled on Friday after yet another escalation of the U.S.-China trade war. Sure, it was a low volume August trading session, but like an early win during preseason, it still counts, and it erased what was shaping up to be a winning week.
There were three Friday morning events that occurred, but only the third one moved markets significantly:
(1) The Chinese government announced that it would impose new tariffs on $75 billion worth of U.S. goods. The move was widely anticipated, after the U.S. had said that it would impose tariffs on the remaining $300 billion worth of Chinese imports. Most of this latest round did not include NEW products (“only $11 billion of the $75 billion of goods are being targeted for the first time,” according to Capital Economics); rather they raised tariffs on U.S. products that have already been targeted.
(2) Fed Chair Jerome (“Jay”) Powell delivered a speech at the annual monetary policy conference in Jackson Hole, Wyoming, where he said the U.S. economic outlook “remains largely favorable,” but added, “trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.” Guess who wasn’t happy about that last comment?
(3) Shortly after the Powell speech, President Trump asked the following question via Twitter: “Who is our bigger enemy, Jay Powell or [Chinese President] Chairman Xi?” We can now add Powell and Xi to the long list of Trump enemies. The presidential Twitter rant continued throughout the day, with Trump’s dictate that American companies are “hereby ordered to immediately start looking for an alternative to China.” Most observers brushed aside the proclamation/threat to the private sector, but paid close attention to the tweet announcing that the President was ratcheting up the next round of tariffs on $300 billion in Chinese goods from 10 to 15 percent and as of October 1, tariffs on $250 billion in Chinese products will rise to 30 percent from 25 percent.
The next phase of the trade war does not mean the expansion will end imminently. Paul Ashworth of Capital Economics notes “the direct impact on the U.S. economy of this latest round of tariff increases is, in isolation, likely to be modest, only 0.1 percent of [U.S.] GDP” but, “there is no way of knowing where it will end.” As the trade war evolves, it will undoubtedly put more pressure on financial markets, business investment and the overall economy.
Just in Time for Labor Day: The segment of the economy that has been cheered, the jobs market, got some bad news last week. The Labor Department released its preliminary benchmark revision of non-farm payrolls in the 12 months to March showing a net DROP of 501,000 positions over the period. That equates to average monthly job creation of only 168,000 in the year to March from 210,000.