The European market (Stoxx-600) closed around 357.50 in the US session Tuesday, slips by almost -0.23% on Trump’s auto and China trade war rhetoric. As per a report or rather than a “floating balloon” ahead of the G20 summit (to pressurize European leaders), Trump may introduce car tariffs as soon as next week. The Stoxx-600 skids from its day high of 358.82 to a low of 355.70.
The report suggests that the US President Trump may impose tariffs on imported cars as early as next week: "The investigation report of the US Ministry of Commerce is on the table of the President and Trump will probably decide the tariffs next week after the G20 meeting in Buenos Aires. The US investigation report recommends a flat 25% duty on car imports from all countries except Canada and Mexico. There will be no exceptions for certain car types and the report recommends as broad a policy as possible."
The report also suggests that the EU Trade Commissioner Malmström will travel to Washington on Wednesday to discuss the issue with the USTR Lighthizer. In July, Trump promised EU Commission President Juncker that he would not impose tariffs as long as the US and EU negotiated a free trade agreement. Trump and Juncker may again shake hands on the sidelines of the G20 summit, but an official meeting is not planned.
The market is concerned that the dispute over possible US tariffs on cars from the EU is not over despite a “handshake” deal between Trump and Juncker a few months ago. The EU has already prepared a list of retaliatory tariffs. As a result, European auto stocks as-well-as EUR plunged, but the overall damage to the export-heavy European markets are limited on lower local currency (EUR/GBP). EURUSD tumbled below 1.13 and made a low of 1.1278, down almost -0.45%, while GBPUSD made a low of 1.2726 (-0.80%) so far, while the US dollar index (DXY) made a high of 97.48, rose by almost +0.40% and Stoxx-600.
Earlier the pre-US session, both European as-well-as US futures were in stress after President Trump late Monday said that additional 25% tariffs on China are still likely. Trump commented in an interview he expects to move ahead with an increase on tariffs to 25% on $200 billion of Chinese goods and he's prepared to add tariffs of 10% or 25% to the final batch of $267 billion of Chinese goods "if we don't make a deal."
The risk-on mood was already under stress on subdued global cues amid renewed concern of an all-out US-China trade war after Trump commented late Monday he would push ahead with additional China tariffs at 25% (from present 10%) on $200B of Chinese goods initially, threatening another $267B, if China does not seek a trade deal with the US.
In an interview aired just after the US market closes on Monday, Trump said it was “highly unlikely” for him to hold off on raising tariffs on $200B in Chinese goods from 10% to 25% from January. He went further to threaten China for more tariffs if they cannot make a deal. Trump also warned “other countries” (EU) on trade ahead of the G19+1/G20 summit. Trump said, “The only deal would be China has to open up their country to competition from the United States and as far as other countries are concerned, that’s up to them”.
Then Trump warned, “If we don’t make a deal, then I’m going to put the $267 billion additional on”. Trump also added it was "highly unlikely" he would accept China's request to hold off on the increase, planned for 1st Jan and further warned that if negotiations don’t work out, he would also put tariffs on the rest of Chinese imports that are currently not subject to any duties.
The risk-on trade was also under stress after another Trump comments that the Brexit deal under current form, the UK will be not able to sign a separate trade deal with the US (although the US has denied that). Trump also pointed out that the Brexit deal sounds like a “good deal” for the EU. GBP was under stress on Trump’s Brexit deal comments coupled with the never-ending UK/EU political drama. Eventually, we may see a “no Brexit”, considering all the pros and cons for the UK to exiting the EU with a bad deal or a no deal.
Mining stocks and commodity producers are lower as well with copper dropped to a 1.5-week low as threats from President Trump of more China tariffs bolsters demand concerns for industrial metals. The slide in equities has boosted the safe-haven demand for government debt as the yield on the 10Y German Bund fell to a 2-3/4 month low of 0.330%, negative for European banks & financials. But energies were helping in higher oil on hopes of backdoor production cut in the forthcoming OPEC+ meet.
US 500
Meanwhile, the US market recovered from the deep plunge and is now trading in green. The SPX-500 future is currently trading around 2678, surged by almost +0.30% as Apple (NASDAQ:AAPL) recovered from a deep slump. Also, the EU has denied any meeting being planned between the EU Trade Commissioner Malmström and the USTR Lighthizer on the reported Trump auto tariffs reports.
Apple
Weakness in technology stocks was leading the overall market lower with Apple slumped in pre-market trading after President Trump suggested a 10% tariff may be placed on iPhones and laptops made in China. In the interview, Trump further clarified that he would put an additional 10% tariffs on imported products like iPhone, Laptops (from China). Trump said a tariff around 10% on goods like iPhones and laptops could temper consumer backlash. After his comments, Apple plunged in the post-trading session late Monday itself. Apple is now trading around 173.64, slips by almost -0.56% and so far it made a low-high of 170.88-174.76 in a volatile day of trading.
Some dovish comments by the Fed VC Clarida also helped the US stocks as he said the central bank is now "much closer" to a neutral rate than it was in December 2015, the first time the Fed hiked since the financial crisis. "How close is a matter of judgment, and there is a range of views on the FOMC. The Fed should take a gradual approach to rate hikes that should also be data dependent”.
On Tuesday, Clarida said: "A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment and humility! To formulate, and then communicate, a path for the policy rate most consistent with our policy objectives. The FOMC, which sets Fed monetary policy, is much closer to a so-called neutral level that is neither simulative nor restrictive than it was when the rate-hiking cycle began in December 2015. But how close is a matter of judgment, and there is a range of views on the FOMC”.
As a reminder, the debate of the neutral rate — referred to in Fed circles as "r*" — is critical as Fed officials consider the path ahead. Fed Chairman Powell rattled markets in early October when he said the current target range for the benchmark funds rate of 2% to 2.25% is "a long way" from neutral.
Clarida said it's important that Fed officials continually update where they think both the neutral fed funds rate and the natural rate of unemployment, or "u*," should be. Clarida said: "This process of learning about r* and u* as new data arrive supports the case for gradual policy normalization, as it will allow the Fed to accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2 percent objective”.
Clarida pointed out: "U.S. monetary policy has for some time and will, I believe, continue to be data dependent in the sense that incoming data reveal at the time of each Federal Open Market Committee meeting where the economy is at the time of each meeting relative to the goals of monetary policy. U.S. economic fundamentals are robust, as indicated by strong growth in gross domestic product and a job market that has been surprising on the upside for nearly two years”.
Clarida also expressed some caution about inflation that continues to run a bit below the Fed's goal of 2% and said policymakers must be careful not to move so aggressively on rates as to harm the recovery or cautiously and risk overheating.
Overall, Clarida sounds less dovish than expected as he backed "gradual rate hikes" even as the neutral rate remains uncertain. Predicting that the US economic expansion will become the longest on record next year, Clarida said that "as the economy has moved to a neighborhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began three years ago”.
He then cautioned, somewhat redundantly, that "raising rates too quickly could unnecessarily shorten the economic expansion while moving too slowly could result in rising inflation and inflation expectations down the road that could be costly to reverse, as well as potentially pose financial stability risks”. While Clarida said the debate of neutral rate remains unclear, he noted that the real federal funds rate is "much closer to the vicinity" of neutral than in Dec 2015, but the actual level of neutral is “uncertain.”
There was a tone of caution, however, when Clarida referenced high-frequency economic indicators, noting that UM inflation expectations remain at the "lower end’" of range consistent with price stability, while TIPS show expected PCE inflation somewhat less than 2%. Basically, Clarida is cautiously focusing on inflation expectations, saying that "it is important to monitor measures of inflation expectations to confirm that households and businesses expect price stability to be maintained”.
Clarida also urged for proper central bank communication/forward guidance and said that "the central bank should find a way to communicate and explain how incoming data are or are not changing the expected path for the policy rate consistent with the best meeting its objectives. Absent such communication, inefficient divergences between public expectations and central bank intentions for the policy rate path can emerge and persist in ways that are costly to the economy when reversed."
Clarida said: “The process of learning about the neutral rate and optimal unemployment rate supports the case for gradual policy normalization, as it will allow the Fed to accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2 percent objective."
But Clarida looked extremely hawkish, when he commented about the size of the Fed's balance sheet, saying he "wants to operate with the smallest balance sheet possible while still achieving objectives”.
Clarida also sounds like a hawk for his comments about excess reserves in his Q&A: "Right now there are obviously abundant excess reserves, and that influences short-run policy rates, and IOER is one that they use. We are discussing and thinking about the pros and cons of different approaches, and that’s a process that’s ongoing. Right now, the current system, I believe, serves us well. It’s fair to say that we’re learning about this as the balance sheet is shrinking, and that is a process that is continuing, will continue in 2019”.
But Clarida also sounds like a dove, when he commented about employment dynamics, observing the continued shortfalls in labor participation among prime-age women & among 25-54-year-old men particularly. On that front, Clarida said he sees room for prime-age labor participation to rise and says productivity gains are both cyclical and structural.
Looking at the economy, Clarida had one particular warning, noting that "an improvement in business investment will be important if the pickup in productivity growth that we have seen in recent quarters is to be sustained. At this stage of the interest rate cycle, I believe it will be especially important to monitor a wide range of data as we continually assess and calibrate whether the path for the policy rate is consistent with meeting our dual-mandate objectives on a sustained basis”.
In his Q&A, Clarida said about adjusting the Fed’s main policy tool, the target range for the federal funds rate: "As you move further away from zero, and as you move toward the range -- the vicinity -- of estimates of the ultimate destination, I just think it’s intuitive that you need to become more data-dependent. Certainly, I would not characterize my thinking as monetary policy on a preset course”. Clarida did not mention either the weak global economic environment at all, suggesting that - for now at least - the Fed is not concerned about the rising economic headwinds rocking Europe, China or other EMs.
Thus the overall Clarida statements may be termed as less dovish than expected or rather than cautiously hawkish and data dependent. The market is now discounting 1 rate hike in Dec’18 and at least 2 hikes in 2019, while the Fed dot-plots is projecting 3 hikes in 2019 apart from the Dec hike. The Fed may go for 3% nominal rate by Q2/Q4-2019 and then will be data (inflation) dependent as Trump may impose additional 25% tariffs (from existing 10%) on $200B of Chinese goods.
As Trump’s trade war agenda is highly uncertain and is depending on his whims and fancy, as a responsible central bank, Fed may not take any undue risk and want to stay well ahead of the Trumpflation (inflation) curve. Although, even if Trump goes for 25% China tariffs on selected Chinese goods carefully so that US consumers don’t have to face any surge in inflation, still the Fed will be cautious.
USDJPY is now trading around 113.84, surged by almost +0.22% on less dovish comments from Fed’s Clarida and Trump’s auto and China trade war rhetorics.
Gold
Gold is currently trading around 1218.70, plunged by almost -0.81% on higher USD. Oil also plunged by almost -2.30% to a session low of 50.38 on a report that Saudi energy Minister to hold a joint briefing with Nigerian Oil minister on Wednesday. Oil made a high of 52.37 so far on Tuesday.