China Fires Warning Shot at U.S. Over Import Tariffs China unveiled plans for tariffs against $3 billion in American goods and said it is readying more actions against the U.S.
A Commerce Ministry spokesman accused the U.S. of “setting a vile precedent” and warned that China was prepared to defend its interests.
“If somebody imposes a trade war on China, we’ll fight to the end,” Chinese Ambassador to the U.S. Cui Tiankai said on state television.
Measures the Chinese Commerce Ministry rolled out Friday target $3 billion in U.S. goods, from fruit and pork to recycled aluminum and steel pipes that would be subject to higher tariffs. The ministry said the penalties are being imposed in response to new U.S. tariffs on Chinese steel and aluminum products, which the Trump administration announced earlier and which took effect Friday.
Missing from Friday’s list are big-ticket U.S. exports to China such as soybeans, sorghum and Boeing airplanes. The absence of those key goods showed that the Chinese government is leaving itself room to escalate—or negotiate. (…)
Specific actions won’t occur for at least one month, as U.S. officials compile a formal list of proposed tariffs and American businesses then get 30 days to comment on the measures. During that time, the Trump administration hopes China will make concessions to avoid a substantial cutoff in trade.
Similarly, China’s response is calibrated. In announcing its response Friday prior to the U.S. actions on steel and aluminum, the Commerce Ministry didn’t give a specific time for imposing the tariffs on U.S. goods and said Chinese companies have until the end of the month to make comments.
(…) “the Chinese side hopes not to fight a trade war, but is definitely not afraid of fighting one.” (…)
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China Started the Trade War, Not Trump President Trump’s China crackdown is risky, but it’s on firmer legal, political and economic ground than many of his other trade complaints, Greg Ip writes.
(…) the collateral damage of a trade war, and thus the risks of Mr. Trump’s strategy, are also much greater. The breadth of his action elevates the potential harm to American consumers, supply chains and exporters.
Mr. Irwin says it isn’t clear that Mr. Trump’s strategy is right. Taking China to the WTO might be a less dangerous approach. But he adds: “No one is saying we shouldn’t do anything.”
(…) China ignored the U.S.’s latest move. Instead, it focused on previously announced U.S. steel and aluminum tariffs coming into effect Friday. Chinese data shows steel and aluminum product exports to the U.S. have been $3-4 billion annually over the last two years: accordingly, China announced it is targeting $3 billion of U.S. agricultural and miscellaneous other exports.
In other words, China is providing exactly what President Trump says he wants: reciprocity. China, which now depends far less on U.S. trade for growth than in the mid-2000s, will likely take a similar approach to the planned tariffs on $50 billion of its exports to the U.S.—respond in kind, but not escalate.
So it’s “the art of the deal” against “the art of war”. Good grief!
Going to war against its main lender may have unintended consequences:
(…) The danger signals at the moment are coming from the money markets, where banks are having to pay a bigger premium to borrow than during the 2012 euro crisis. Savers are directing their money to the U.S. Treasury rather than the banks, just as they did in the past two major crises.
The cause this time isn’t a panicked flight to safety. Yet, the money-market stress comes amid a transition to a new phase of the financial and economic cycle. It is a time when those who fail to prepare can be exposed—and in the past such shifts have led to the collapse of hedge funds and banks, and even sovereign defaults.
(…) the money markets are being distorted by a combination of vast U.S. government borrowing needed for the deficit-financed tax cut and companies shifting offshore money from corporate bonds into cash ready to spend. Regulatory restrictions on balance sheets limit banks’ ability to step in and even out the distortions. (…)
The U.S. Treasury is crowding out short-term financing for the private sector, while the huge cash piles that companies built up are no longer available to finance other companies’ bonds.
The result is that the trillions of dollars of loans tied to Libor cost more than they otherwise would, while high-quality, short-term corporate bond yields are up, albeit from low levels. The effect is similar to the Fed having raised rates twice this week, rather than once. (…)
The change in the regime is big: from dovish to hawkish, midcycle to late cycle, fearing deflation to fearing inflation. Hopefully the victims of the shift this time won’t be big enough to shake the entire system.
Known unknowns…or unknown knowns! Thankfully, the Ted Spread is quiet.
(…) Yet recent data have suggested inflationary pressures are still relatively muted—something that could help cap a rise in bond yields for now. A gauge of consumer prices rose less than expected in February, while wage growth slowed from the previous month and the annual wage gain in January—one element behind the selling in stocks and bonds earlier in the year—was revised downward. (…)
Hmmm…
Again, the facts:
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U.S. Producer Prices Continue Upward Trend Core PPI rose 0.4% in each of the last 2 months and is up 2.7% YoY. Core Goods PPI has gained 0.2% in each of the last 3 months (+2.1% YoY). Prices for intermediate demand goods strengthened 0.7% (4.8% y/y). This is the seventh consecutive month of gains of 0.5% or greater. Goods have been in deflation for years but seem clearly set to add to inflation in 2018.
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U.S. import prices rise more than expected in February Import prices ex-petroleum jumped 0.5% in each of the last 2 months.
- And now this:
The White House is putting together a package of 25% tariffs on Chinese imports, and Mr. Trump’s advisers said they had targeted 1,300 product categories. The president said that action could affect imports of “about $60 billion,” but his advisers, speaking earlier, said that it was more likely to be $50 billion, or roughly 10% of the more than $500 billion the U.S. imported from China last year.
The Conference Board Leading Economic Index rose 0.6% to 108.7. (…) The index rose 0.8% in January and 0.7% in December.
The index rose despite a downturn in the stock market and weakness in February housing construction metrics. (…)
The board’s coincident index, designed to reflect current economic conditions, rose 0.3%. The lagging index increased by 0.4%.
The 6 and 12-month rates of change have usually been declining prior to recessions as the Doug Short charts illustrate.
SENTIMENT WATCH
Bespoke’s charts reveal that the crowd suddenly got a lot less bullish…but not more bearish, going neutral instead which means “dunno!”:
The S&P 500 closed yesterday right on its 100-day m.a. and 2.1% above its still rising 200-d m.a. (2582) which was successfully tested on Feb. 9. At 2582, the S&P 500 would sell at 20.5 on the Rule of 20 (using pro forma Q1’18 EPS to reflect tax reform after Q1).
The earnings backwind will remain strong in April-May as we get into the Q1’18 earnings season with forecasts for +18.3% EPS growth. We are almost at quarter end and pre-announcements remain quite positive.
The risks to valuations are thus inflation and interest rates. The risk to sentiment is Trump vs China.
Source: Committee for a Responsible Federal Budget 
