US-China Trade War Prospects Weigh on Risk Assets

 

Trade War with China Heats Up

This morning the White House formally announced that the US would be imposing tariffs on approximately $50 billion of Chinese goods, specifically aimed at the technology sector.  US trade representative Robert Lighthizer characterized the list of tariffs as “very moderate, very appropriate”, with commonly purchased Chinese consumer goods such as cell phones and tv’s not included in the population.  It didn’t take much time after the announcement from the Trump administration for China to unveil a set of retaliatory tariffs on American exports.  Crude oil, cars and agricultural products represented the main targets in the response from the Chinese State Council, as China’s Foreign Ministry spokesman Lu Kang blamed the US for “provoking the trade war.” 

 

 

The increased potential for a trade war with China prompted a mild flight to safety in financial markets to finish the week.  All three major US stock indices traded lower on the day, with the DJIA shedding 0.35%, Nasdaq losing 0.19% and S&P 500 dropping 0.11%.  Treasurys rallied for a second consecutive trading session, with yields/swap rates declining 1-2bps across the curve.  The yield on the 10-year note is poised to finish the day around 2.92%, down about 3bps from where it opened the week.  In commodities, WTI crude futures tumbled 3.8% to $64.30/barrel as energy markets remain uncertain as to the output of the production meeting between OPEC and its allies next week. 

 

 

Industrial Production Pulls Back

Data from the Federal Reserve reported industrial production declining for the first time in three months during May, down 0.1%, albeit April’s level was upwardly revised to a strong +0.9%.  Compared to a year earlier, industrial production rose 3.5%.  The bulk of the pullback was attributed to a 0.7% decline in manufacturing output, which was largely a result of a fire which disrupted production at a major Ford supplier last month.  The contraction in factory output outweighed production increases for the utilities (+1.1%) and mining sectors (+1.8%).  Also reported in the release, capacity utilization, a measure of current vs. potential output at plants, edged 0.2% lower to 77.9% — slightly below expectations of 78.1%.

 

 

BOJ Keeps Ultra-Easy Policy

This week’s trio of significant central bank meetings wrapped up today with the Bank of Japan deciding to leave its ultra-loose monetary policy unchanged via an 8-1 vote.  Weak inflation growth in Japan continues to be the main factor in the BOJ’s plan to “patiently continue current monetary easing”.  Similar to the Federal Reserve, Japan’s central bank has its inflation target set at 2%.  However there has been two consecutive months of decelerating consumer-price growth in Japan, and the YoY rise in inflation during April was an anemic 0.7%.  “The divergence of monetary policies reflects different economic and price conditions in each country,” BOJ Governor Haruhiko Kuroda acknowledged in the press conference following the meeting.  The BOJ’s current monetary policy includes a -0.1% benchmark interest rate and an asset-purchasing plan to maintain a 10-year JBG yield of 0%.