Are trade tensions slowing down China’s economy?

On the latest edition of Market Week in Review, Adam Goff, managing director, investment practice, and Sam Templeton, manager, global communications, discussed recently released economic data points for China and the U.S., as well as U.S. Federal Reserve (the Fed) Chair Jerome Powell's remarks on inflation and the state of monetary policy.

Chinese exports fall as trade tensions with U.S. continue

With the U.S. and China ensnared in a trade war, there's been heightened concern over how China's economy will respond to the slew of tariffs imposed by the Trump administration. September's Caixin/Markit Manufacturing Purchasing Managers' IndexTM (PMI) reading of 50 confirmed that the tariffs are likely having a detrimental effect, Goff said. "China's PMI numbers have been sinking steadily over the last few months," he observed, "and while a PMI of 50 is still roughly a neutral number, compared with where China has been--and the kind of growth that's been expected from the country--it's not a particularly impressive reading." He noted that what really dragged China's September PMI down was a slump in exports, due to elevated trade tensions.

"None of this is surprising, given how export-oriented the Chinese economy is," Goff remarked, adding that government officials in China have been stepping up measures to try to protect the economy from the impact of declining exports. These efforts include some tax cuts, in addition to changes in reserve ratios for banks, he said.

Glowing report for U.S. businesses as economy hums along

Shifting to the U.S., Goff said that the effect of trade tensions has been much more muted, with the U.S. economy continuing to churn at a robust pace. For instance, the Institute for Supply Management (ISM)'s non-manufacturing index (which gauges the growth of the U.S. services sector) hit an all-time high of 61.6 during September, Goff said--well-above what had already been lofty expectations. "A number of 50 is generally considered neutral, and anything above 55 is considered very strong, so a reading of 61.6 is pretty stratospheric," he said.

All told, the overall picture in the U.S. remains good, Goff concluded, with both consumer confidence and small business confidence nearing record highs.

Powell's remarks on monetary policy move markets

So, how might the Fed react to the red-hot U.S. economy? In an Oct. 2 speech at the National Association for Business Economics, Chair Jerome Powell made it clear that he envisions continued interest-rate increases--and that the central bank is prepared to not only get to a non-accommodative neutral monetary policy stance, but move beyond that into restrictive territory if inflation begins to surge more than forecast.

Powell's comments seemed to really spark some moves in U.S. markets, Goff said, noting that the yield on the 10-year U.S. Treasury note spiked to 3.02% on Oct. 3, and has remained above that level ever since. While more expensive stocks generally saw a decline in prices on Oct. 4, per the S&P 500® Index, financials typically did well that day, as they tend to benefit from a steepening U.S. Treasury yield curve, he explained.

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