Trade Talk, Actions Roil The Markets

President Trump has directed a lot of his attention so far in 2018 at trade policies, and the markets noticed.

Trade policies were always a key part of the president’s campaign talking points and agenda, but they were in the background through the first year of the administration. A few modest moves on trade were taken, such as imposing tariffs on lumber imports from Canada.

Things changed in 2018. On Jan. 22, new tariffs were announced on washing machines, solar panels and solar cells. They were followed by the widely publicized tariffs on steel and aluminum.

The major stock indexes declined significantly after the steel and aluminum tariffs were announced. There’s more on that front to come.

Specifically, President Trump is expected to announce tariffs and investment restrictions on China today. That announcement is likely to be accompanied by a report of an investigation into alleged unfair trade practices by China. Initially, these actions weren’t expected until April. In addition, the next round of North American Free Trade Agreement (NAFTA) negotiations is scheduled to start in April and continue through the year.

Investors should pay attention to these and other trade developments and determine whether changes in investment strategy are warranted. I think there has been a pattern to the trade news.

First, the president issues a broad statement or policy that seems to severely restrict trade. Then, changes, amendments and deeper explanations are issued over the next days and weeks to make the policy seem much milder. In the end, it seems the initial move or announcement was made to stimulate a negotiation.

The steel and aluminum tariffs followed that pattern. Initially, the announcement was that the tariffs would be broad and without exceptions. Gradually, exceptions were announced and a process was created for consideration of additional exceptions. Eventually, the tariffs seemed to be a tool to encourage some allies to be more flexible in trade treaty negotiations. For example, the tariffs against Canada and Mexico were delayed, pending the outcome of NAFTA negotiations.

Most of the trade talk and actions seem to have a goal of changing the trade relationship with China. They’re likely aimed at causing China either to begin negotiating new trade terms or announce policy changes, such as new efforts to reduce theft of intellectual property and trade secrets from other nations.

Even if the attentions are what I suspect, these events could result in a full-scale or even modest trade war, and that would be very bad for the global economy and markets. That’s why stock indexes decline sharply with each new announcement of tariffs and other restrictions.

So far, however, global trade continues to increase, and other countries are entering into new trade agreements, even when the United States isn’t participating. While some countries threatened retaliation against the United States for the new tariffs, the threats generally were vague and not coupled with substantive actions. The most substantive countermeasures have been issued by Europe against U.S. technology companies. These are part of a long-term pattern and would have happened anyway.

For now, it appears the U.S. actions are taken to shape changes in trade agreements and policies. They do roil markets in the short term, increase volatility and make investors more cautious about the long-term outlook. That’s unfortunate, but so far it isn’t a good reason to change investments. Still, don’t be complacent. We need to be alert for signs that the trade actions are escalating into protectionism by the United States and retaliation by other countries.

The Data

Manufacturing seemed to bounce in February. Last week, we reported on very strong surveys from a couple of Fed regional banks and the recent jump in manufacturing employment.

Industrial Production also had a spurt. The headline number increased 1.1% from January, though January was revised down to a 0.3% decline from 0.1% dip. More importantly, the manufacturing component of the report increased 1.2% for the month. Business equipment was a big part of that manufacturing increase, and that could indicate businesses are investing more.

Consumer Sentiment, as measured by the University of Michigan, rose to a 14-year high, measuring 102.0 compared to 99.7 last month. The consensus forecast was for sentiment to decline.

Housing starts and permits both declined in February. Starts declined 7.0% and permits declined 5.7%. Both numbers were below expectations. Most of the decline was in multi-family housing. Single-family home starts rose 2.9%, and single-family home completions increased 3.0% for the month.

But sales of existing homes bounced back. Total home sales increased 3.0% for the month. That brings the 12-month sales back to positive territory with a 1.1% increase. Even better, single-family home sales increased 4.2% for a 1.8% 12-month increase. Inventory of homes available for sale also increased, though inventory still is low by historic measures. Condominium sales remain weak.

Home prices also increased, according to the FHFA House Price Index. The measure showed single-family home prices increased 0.8% for the month and 7.3% for 12 months. Last month’s increases also were revised slightly higher. The highest gains are in the West, though other regions also are experiencing strong increases.

The economy remains strong, according to the Index of Leading Economic Indicators issued by The Conference Board. The Index was up a solid 0.6%, though last month’s 1.0% increase was revised down to 0.8%.

The JOLTS (Job Openings and Labor Turnover Survey) was consistent with past reports showing a strong labor market. There still are considerably more job openings than there are people being hired, indicating employers are having trouble finding the workers they want. Despite that, the quits rate has been around 2.2% for some time. Normally, when unemployment is low, people are quitting jobs for higher-paying positions.

New unemployment claims increased only 3,000, keeping the number of claims near record lows.

The Markets

The S&P 500 dropped 1.38% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 0.33%. The Russell 2000 fell 0.36%. The All-Country World Index gave up 0.91%. Emerging market equities gained 0.02%.

Long-term treasuries fell 0.96% for the week. Investment-grade bonds declined 0.53%. Treasury Inflation-Protected Securities (TIPS) lost 0.16%. High-yield bonds gained 0.11%.

The dollar was unchanged.

Energy-based commodities surged 3.21% for the week. Broader-based commodities returned 0.04%. Gold rose 0.63%.

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