Does U.S. Have the Upper Hand in Trade War? A Consensus Is Emerging

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Does U.S. Have the Upper Hand in Trade War? A Consensus Is Emerging

Did President Trump pick a good time for the U.S. to engage in a trade war with China? There seems to be a growing consensus in his favor — politically and economically.

First, prominent members of the opposing Democratic party are voicing support. That includes both Nancy Pelosi in the House of Representatives and Charles Schumer in the Senate. Wall Street bigwigs Jamie Dimon and Lloyd Blankfein, both Democrats, agree.

Media outlets usually critical of President Trump have also lined up in his favor. Yesterday, for instance, a column in The Washington Post declared “Trump didn’t start this trade war. China did.” MarketWatch opined that “the media is lying” about the president’s tariffs, calling them “a good thing, even if you don’t like him.”

On Monday, Minneapolis Federal Reserve President Neel Kashkari said “relative to China, the U.S. is in a very strong position.” Reuters took a similar angle this morning, concluding that “China is running out of options.”

Those arguments were mostly economic, which is really the most important part of the story.

China Sputtering

After all, China’s economy is sputtering. The freshest batch of data from Beijing today — industrial production, retail sales and fixed investment — all missed estimates. Clothing sales dropped for the first time in a decade as wages at the lower end of the income scale come under pressure. (Just the opposite is happening in the U.S.)

Today’s numbers were the latest in a series of negative reports this month:

  • May 8: China’s April trade surplus cratered to barely one-third of the expected amount. Ironically, countries other than the U.S. caused the miss.
  • May 8: Bloomberg reported that 2019 will be a record year for corporate defaults in China.
  • May 9: Chinese banks issued just 1.02 trillion yuan of new loans, missing the 1.69 trillion yuan forecast by a country mile.

The effects of the trade war are being felt in many other countries as well. Yesterday, Germany’s forward-looking Zew survey of business sentiment unexpectedly fell because the trade war raises doubts about European exports to China.

iShares China Large-Cap ETF (FXI) with moving averages and relative strength indicator.
iShares China Large-Cap ETF (FXI) with moving averages and relative strength indicator.

Other items this month include Australia’s central bank cutting growth forecasts and poor South Korean unemployment data. Two Asian central banks, the Philippines and Malaysia, lowered interest rates to shield against weakness spilling over.

Interest Rates, Housing

That brings us to interest rates, the one thing that seems most clear amid all the uncertainty. Treasury yields are probing their lowest levels from March. Below that range, you have to look back more than a year to late 2017 to find similar readings.

That, in turn, is helping “income stocks” like consumer staples, real-estate investment trusts and utilities. There’s also a question of how long before these lower rates trickle through to housing.

Did you see the NAHB homebuilder confidence index shoot past estimates today? Don’t forget another slug of data is due on Thursday morning, when the government reports housing starts and building permits.

Of course, not everyone supports Trump’s stand against China. Economists and strategists at big investment banks are the main critics. Jan Hatzius at Goldman Sachs (GS) and Mike Wilson of Morgan Stanley (MS) seem to be the most outspoken. Business groups including the U.S. Chamber of Commerce and National Retail Federation also object.

In conclusion, while trade war continues, it seems investors and U.S. leaders are growing less scared of the risk. Some may even see it as an opportunity. Regardless of where you stand, the dispute has at least made the market interesting again… and traders never complain about that.

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