Could escalating trade tensions hurt the U.S. economy?
On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Sam Templeton, manager, global communications, discussed trade tensions between the U.S. and China, the U.S. employment report for July, and the recent spate of central bank meetings.
Trade spat between U.S. and China heats up
Strong rhetoric between the U.S. and China surrounding trade continued the week of July 30, Eitelman said, with the U.S. first announcing it may increase the rate of proposed tariffs on $200 billion worth of Chinese goods from 10% to 25%. In response, China announced on Aug. 3 that it may impose tariffs on $60 billion worth of U.S. goods, at rates ranging from 5% to 25%, Eitelman said.
“This escalation in the trade dispute between the two nations continues to be a downside risk to the global market cycle,” he remarked, “but from our perspective, the numbers aren’t quite large enough to have a meaningful impact on the U.S. economy.” However, for emerging markets, the story is beginning to play out a little differently, Eitelman noted. “Because emerging markets are much more exposed to global trade, the team of strategists at Russell Investments is starting to trim our cyclical outlook for this asset class a bit more,” he said.
Strong July employment report in U.S.
The U.S. economy added 157,000 jobs during July, according to a report released Aug. 3 by the Labor Department, Eitelman said. While the total number of nonfarm payrolls was slightly below consensus expectations, upward revisions were made to job additions in May and June, he noted. “Averaging out the numbers from the last several months, the U.S. is still creating roughly 200,000 jobs a month—which is a very, very strong number, particularly this late in the market cycle,” Eitelman stated.
He also noted that the nation’s unemployment rate for July fell to 3.9%—nearing the lowest level seen during the current economic expansion. “All things considered, the U.S. labor market is really strong,” Eitelman said, “and at the margin, the tightness in the labor market is starting to feed through into higher wage growth.” He noted that, in general, wage inflation is increasing—but at a gradual pace, which in turn is allowing the U.S. Federal Reserve (the Fed) to very slowly raise interest rates.
Fed upgrades economic outlook, BOE hikes borrowing costs
Zeroing in on the Fed, Eitelman noted that the central bank’s Federal Open Market Committee met the week of July 30, and, as expected, held off on raising interest rates. In a statement released after the meeting, however, the Fed upgraded its assessment of the U.S. economy from solid to strong—which Eitelman believes is indicative of the central bank’s plans to continue through with another rate hike in September. “Overall, it looks like the Fed is still committed to increasing borrowing costs at a pace of roughly once a quarter,” he said.
The Bank of England (BOE) and Bank of Japan (BOJ) also held monetary policy meetings the week of July 30, Eitelman said—with the BOE increasing interest rates for the second time since the economic expansion began. “It was a bit of a surprise that the BOE’s decision to hike rates was unanimous,” Eitelman remarked, adding that in his opinion, the primary catalyst for the increase was stronger inflationary and wage pressure in the UK economy.
Meanwhile, the BOJ left its interest rate unchanged, Eitelman said—but on a more interesting note, tweaked its policy regarding the 0% yield target on its 10-year government bond. “The BOJ is now going to allow a little more wiggle room in the trading range,” he said, explaining that yields on the 10-year bond can now move by up to 20 basis points. This marginal change caused global bond yields to rise following the BOJ’s announcement on July 31, Eitelman noted, even rippling to the U.S., where the yield on the 10-year Treasury note rose to 3% on Aug. 1.