Trump’s Tariff plans trigger a Trade War

Daily Analysis - 02/03/2018

Trump’s Tariff plans trigger a Trade War


Trump’s remarks adding tariffs on steel and aluminum plunged the already shaky US equities and on Friday the Asian stocks took a big hit. However, Jerome Powell tried to calm investors’ nerves by stating, at his second testimony, that there are no signs the US economy is overheating.

Trump’s Trade War

Tariffs are coming next week according to the U.S. President Donald Trump announcement yesterday and the blue chip index Dow Jones plunged 420 points. Automakers and manufacturers took the biggest hit. Trump’s planned tariffs on steel and aluminum can change global trade and cost jobs, with the risk of tit-for-tat measures.

Following a rough night on Wall Street Fears of an escalating trade war, hit the equity prices of Asian steelmakers and manufacturers supplying U.S. markets.

Trump pledged to restore the U.S. industry and punish what he sees as unfair trade practices, particularly by China. US Steel was one of the few stocks to stay in the green, gaining 5.75% on the news that foreign steel would be subject to a 25% import tax. Aluminum will be taxed at a 10% rate.

South Korea, the third-largest steel exporter to the United States after Canada and Brazil, said it will keep talking to U.S. officials until Washington’s plans for tariffs are finalized.

Asian steelmakers fear U.S. tariffs could result in their domestic markets becoming flooded with steel products that have nowhere else to go.

On Friday, stock markets in Asia extended Wall Street’s overnight losses, with investors shocked by the threat of a global trade war after President Donald Trump remarks that the United States would impose heavy tariffs on imported steel and aluminum.


Jerome Powell’s 2nd testimony in a week

Ahead of the Federal Reserve’s chair second round of Congressional testimony, US stocks pointed down for a third consecutive session. Traders were on edge during Powell’s Congressional testimony after his comments on Tuesday about the strength of the U.S. economy opened the door to speculation that the central bank plans to quicken the pace of monetary tightening, a move investors worry could disrupt growth.

Since Powell's debut before the House of Representatives Financial Services Committee on Tuesday, markets have been looking for clarity over whether the Fed will accelerate the pace of its rate increases this year.

Investors digested Senate testimony by the Fed’s Powell, said the economy wasn’t overheating and labor markets may still have room to improve as the central bank sticks with a gradual pace of interest rate increases.

The 4.1% unemployment rate was "at or near or even below" estimates of the full employment rate, "we don't see any evidence of a decisive move up in wages ... Nothing in that suggests to me that wage inflation is at a point of acceleration," Powell testified.

The Fed is actually going to be wondering whether or not four rate hikes are going to be enough this year. Next Friday, March 9th, the Jobs report for February – Nonfarm Payroll – can provide a better picture on where the US economy is heading.


Japan's central bank chief says may debate easy policy exit if price goal met

Japan’s central bank chief said on Friday he would consider ending the stimulus and ultra-loose monetary policy if inflation hits its target by March 2020, in comments that sent the yen higher and triggered a bond sell-off.

Following his remarks, the US dollar fell against the yen and Japanese government bond prices slipped, which triggered market expectations the BOJ would follow in the footsteps of its major peers withdrawing from the monetary stimulus earlier than expected.

Kuroda has been nominated by the government to serve another five-year term after his current term ends in April. The nomination needs approval by both sides of parliament, which is a near certainty as Prime Minister Shinzo Abe’s governing coalition holds a comfortable majority.

Some analysts have called on the BOJ to raise rates before inflation hits 2%, arguing that it was too high a level to aim for in a country that has suffered from two decades of deflation.

Kuroda said the BOJ could discuss an exit strategy from its ultra-loose policy and communicate its plan with markets once the appropriate time comes. But he said now was not the time to push for an exit with inflation still away from the BOJ’s target.


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