It could be the greatest economic showdown in history. The world’s largest economy is standing up for free trade in the world and while turmoil is raising concerns about a global economic slowdown, the reality is we’re seeing a readjustment to the global economy that could sharply reduce inflation, lower interest rates and get the government’s debt of the United States under control. President Trump slapped a 104% tariff on China over and above existing tariffs.
Stock markets that were recovering yesterday on reports that countries were willing to negotiated soaring as Treasury Secretary Scott Bessent told Larry Kudlow on Fox Business that President Trump “going to be directly involved in those negotiations”. The Treasury secretary said he hadn’t seen any specific offer from Japan but told Kudlow that, “50, 60, maybe almost 70 countries” have gotten in contact with the Trump administration looking to negotiate.
Stocks then plummeted in one of the biggest reversals in the S&P 500 futures history, on reports that China would not back down, raising concerns of a global economic slowdown. Yet while the panic is still running rampant there are things that the Federal Reserve could do to calm the waters, so it is not all doom and gloom. For example, cut interest rates! And there is the possibility that China could actually be blinking in this economic showdown even as it was announced China decided to respond by adding an 84% tariff on us goods.
Elizabeth MacDonald of Fox Business reported that that Dow, S&P, Nasdaq 100 Futures futures all turning around now as China calls for dialogue on tariffs and trade. Nasdaq futures are now in the green, others down fractionally. EMAC said that the rapid spike in 10-year and reports indicate that hedge funds have been selling substantial amounts of U.S. Treasury holdings. This is largely due to the unwinding of the “basis trade,” a leveraged arbitrage strategy that exploits price differences between treasury bonds and their futures contracts. Now she says that “China’s top leaders have scheduled an emergency meeting to address economic concerns and stabilize capital markets." According to MacDonald this marks the first public high-level gathering since the tariff escalation.
Attendees will include members of the Chinese State Council and key regulatory bodies such as the People’s Bank of China, the Ministry of Finance, and commerce and securities regulators. Discussions are expected to focus on strategies to boost domestic consumption, support capital markets, and potentially introduce export tax rebates. No talk yet if dropping tariffs or trade barriers. China so far only offering existing tariff exemptions.
China’s stimulus package may provide temporary relief, but a deeper issue remains: China’s economy heavily relies on exporting goods to the United States. Although many may dislike the market turmoil, early indications suggest that the trade war is addressing some of the United States economy’s significant issues. One major concern for US consumers has been inflation, which has reached levels unseen since the 1970s.
Paul Volcker faced criticism for raising interest rates, causing initial discomfort, but ultimately helping to reduce inflation and increase consumer savings. Inflation diminishes prosperity for Americans, and if it can be controlled, the trade war might prove beneficial. Consumers will be getting big savings at the gas pump, that’s for sure. Yet with gas there is always a “but”.
That “but” was a report that the Keystone oil pipeline had to be shut down on Tuesday because of a leak in North Dakota. Some are concerned that the shutdown of the pipeline if it’s for an extended period of time could halt the flow of millions of gallons of crude oil from Canadian refineries to US refineries which could lead to higher gasoline prices.
Now there are some people that are saying that Saudi Arabia’s lowering the oil price to regain market share is trying to take advantage of the market turmoil and put pressure on the US producers. Most producers break even on the average estimated to be somewhere around $60.00 a barrel. Today, while different basins have different break evens, the reality is that we’re already seeing signs that we could see some cutbacks in cap ex. Is OPEC going to try to steal that market share. Stay tuned.
The American Petroleum Institute’s oil inventory data from yesterday would typically provide some support. The API reported a reduction in crude oil inventories by 1.057 million barrels from the previous week. Cushing, OK inventories increased by 636,000 barrels, gasoline inventories rose by 207,000 barrels, but distillate inventories experienced a notable decline of 1.844 million barrels. This decrease is attributed to the cold winter and the chilly start to spring, which forced refiners to continue producing distillate to replenish supplies.
Natural gas prices declined partly due to increasing competition with coal. Fox News reported that President Trump signed an executive order on Tuesday to boost coal production amid rising electricity demand. In the United States coal remains the third most used energy source, following natural gas and nuclear power.