HIGHLIGHTS OF THE WEEK
- US-China trade tensions spiked last Friday as both countries announced more protectionist measures against each other, but later eased this week. Equity markets swept the escalation under the rug, making a full recovery on the week.
- Second-quarter U.S. GDP growth was little changed in a second reading, but consumption was revised up to an even better 4.7% annualized. Real spending was up 0.4% m/m in July, making for a solid start to third-quarter consumption.
- A cloud of uncertainty continues to weigh on the global economic outlook. The odds of a no-deal Brexit have increased following a planned shutdown of the UK’s Parliament from September 9th to mid-October. Meanwhile, parties are scrambling in Italy to form a new government, but the potential new coalition government stands on shaky footing.
Uncertainty Still Name of The Game
As Americans rushed off to start the weekend last Friday, President Trump announced that the U.S. was ratcheting up existing and planned tariffs on China by 5 percentage points. The measures, which would affect some $550bn in goods, were a response to China’s announcement that it would raise tariffs on $75bn worth of U.S. goods. However, tensions eased this week on indications that China wants to get back to the negotiating table, and would refrain from immediate retaliation to the latest U.S. action.
Equity markets shrugged off last Friday’s escalation, making a slow but full recovery on the week. Yet, there are strong indications that the trade conflict is a long way from being resolved. China clarified this week that products listed more than once in its three retaliatory rounds would in fact face a cumulative tariff rate. This would bring the tariff rate to 30% or higher for some imported U.S. products, including some autos and parts. On the other hand, the U.S. is still pushing ahead with an increase in the tariff rate from 10% to 15% that will affect $125bn in goods starting this Sunday. Altogether, these steps may jeopardize progress in talks scheduled for September.
With trade dominating headlines once again, including an agreement in principle between the U.S. and Japan, economic data took a backseat. A second reading on U.S. economic growth left the picture relatively unchanged for the second quarter. The headline GDP print was shaved back marginally from 2.1% annualized to 2%, but consumer spending was upgraded from 4.3% to 4.7%. The consumer is poised to remain a central part of the growth story, with real spending up 0.4% m/m in July, making for a solid start to third quarter (Chart 1). Lower interest rates should help stimulate spending further, but much rests on the confidence channel. While overall sentiment remains upbeat, consumer expectations retreated in August, with trade skirmishes and talk of an impending recession weighing on people’s minds (Chart 2). The yield curve remained inverted this week, with the 10-to-2 year Treasury yield spread steadily in the red.
A veil of uncertainty continues to weigh on the broader global economic outlook. In Latin America, the Argentine peso severely weakened as the country remains in economic crisis and on the brink of default. Meanwhile, across the pond, the UK’s parliament is set to be suspended for a few weeks at the request of PM Johnson in an effort to make an unimpeded final push for Brexit before the October 31st deadline. Next week will likely prove to be a tumultuous Parliamentary session that could see a vote of no-confidence put forward by the opposition Labour leader, and an election call possible before the week ends. A snap election could delay Brexit further. Meanwhile in Italy, two parties are attempting to form a new coalition after the Northern League pulled out of the ruling coalition government. A prospective new alliance between an anti-establishment and a center-left party appears to stand on shaky ground. Moreover, opinion polls indicate that the the Northern League remains the most popular party, so the tide could again turn quickly. It’s clear to see that uncertainty is still the name of the game.
Admir Kolaj, Economist | 416-944-6318
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