Will the U.S.-China trade war hurt consumer spending?

On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Sophie Antal Gilbert, head of AIS business solutions, discussed the recent setback in U.S.-China trade negotiations and what it may mean for markets going forward. They also chatted about the trade war’s potential impacts on U.S. Federal Reserve (the Fed) monetary policy and Chinese fiscal stimulus.

Stocks rebound after rocky start, but trade war has markets on edge

The biggest driver in markets this week was China’s May 13 announcement that it will slap tariffs on $60 billion worth of U.S. goods, in retaliation for U.S. President Donald Trump’s May 10 decision to increase tariffs on $200 billion worth of Chinese imports. U.S. stocks sold off in the wake of the news, Robison noted, but steady gains in the days following led the S&P 500® Index to end the week approximately flat. Emerging markets, he said, were hit harder by the news, with the MSCI Emerging Markets Index finishing the week of May 13 down roughly 3% (as of mid-morning Pacific time on May 17).

Outside of the volatility, the setback in trade talks also led to a temporary hit in inflation, in addition to renewed worries over consumer spending, Robison explained. “Over the last few days, a few large U.S. retailers have announced price increases due to the ramp-up in tariffs,” he stated, “and this could potentially crimp consumer spending.”

What markets are likely to fret about even more is a potential dip in capital expenditures, Robison said—a possibility that could be heightened if Chinese tech giant Huawei is blocked from doing business with American companies. “U.S. CEO confidence is already at low levels,” he noted, “so a reduction in business spending and investment could be quite unsettling for markets.”

Could stalled trade talks cause the Fed to alter monetary policy?

Shifting to the Fed, Robison noted that the market-implied probability of a reduction in interest rates this year is roughly 75%—a viewpoint that he and the team of Russell Investments strategists disagree with. “Despite escalations in the trade war, recent macroeconomic indicators have actually been quite good,” he stated, referencing positive news from the latest Empire State Manufacturing Survey as well as the Philadelphia Fed manufacturing index.  

“Importantly, both of these surveys came out around or slightly after the souring in U.S.-China trade relations,” Robison said, “which we believe shows that U.S. companies are actually doing fine for now.”

Additional Chinese stimulus a possibility as trade war escalates

The stalled trade negotiations may have a larger impact on China than the U.S., Robison said. “On the macroeconomic front, China has been doing OK, although recent industrial production numbers from April came in a bit lower than expected,” he observed. Robison noted that these numbers were released prior to the trade-war escalation—and that industrial output could fall further if Huawei is barred from importing its products to the U.S. “This may lead the Chinese government to take additional stimulatory measures, which would really stabilize economic growth in China,” he concluded.

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