Tags: impact | tariffs | economy | trump

Corporate Investment, Hiring Hinge on Trade Policy

Corporate Investment, Hiring Hinge on Trade Policy
(Dollar Photo Club)

Thursday, 21 June 2018 09:28 AM Current | Bio | Archive

India has now also confirmed its (first) part in the slow process of imposing tariffs on U.S. imports in retaliation for earlier US tariffs on goods made in India.

The import duty on chickpeas and Bengal gram, which is a yellow lentil closely related to the chickpea family, has now been increased to 70 percent and will take effect from August 4.

India raised tariffs on a slew of items, echoing hereby steps already taken by China, the European Union (EU) and other trading partners

Financial markets are still assuming that there will be some kind of negotiated settlements to the trade problems, and because of that, so far at least, markets have not really reacted to this.

However, at the ECB Forum on Central Banking that takes place in Sintra, Portugal, in otherwise positive comments, Fed Chair Jerome Powell did cite "trade" as being a risk to the growth outlook mentioning that both investment and hiring plans in the United States appeared to be being delayed given the uncertainty around trade.

During a panel discussion, the Fed chair said: “Changes in trade policy could cause us to have to question the outlook. For the first time, we’re hearing about decisions to postpone investment, postpone hiring.”

Fed Chair Powell’s remarks were also echoed by ECB President Mario Draghi, by Bank of Japan Governor Haruhiko Kuroda and by the Reserve Bank of Australia Governor Philip Lowe.

By the way, those four central banks set monetary policy for more than a third of the world’s economy.

ECB President Mario Draghi, at the same event, said that it was still too early to measure a significant economic impact, but that he had begun worrying about an erosion of confidence, among both businesses and consumers saying: “It’s not yet time, in a sense, to see what the consequences on monetary policy of all this can be … There’s no ground to be optimistic on that.”

Investors could do well keeping in mind that a trade war, which is still not the case today, would be a headache for central banks given it would likely deal stagflationary blows to their economies by forcing consumer prices up and demand down.

The policy makers would then be forced to decide whether to act to support growth or cap the inflationary pressures, for example by hiking interest rates.

It should be clear that “investment and hiring” is not just about the tariffs or taxing of trade but also about how "long" company managements believe the U.S. tariff policy will continue.

If a company thinks that this is all about “the art of the deal” or that there may be a change in U.S. government in 2 years’ time, then the incentive to delay investments and fire U.S. workers could be rather limited.

If, however, company managements start to believe that this will be a policy for six more years, then there may be an incentive to stop investing and to start laying off workers in the U.S.

In this regard, the U.S. trade tariffs are already being considered alongside President Trump’s personal approval ratings.

Emerging Markets

Index provider MSCI said yesterday it will reclassify Argentina as an emerging market and begin including Saudi Arabia in that classification, hereby sharply broadening the investor base for both countries in a move that could be supportive of their equity markets. The decisions will be effective by mid-2019.

This action sets the stage for investor money that tracks the benchmarks for coming into their respective local stock markets, which otherwise wouldn’t have been the case.

Being included into a major benchmark can have big impacts. JPMorgan estimates that there are about $384 billion that passively track MSCI’s emerging markets indices, and another $1.1 trillion that is benchmarked against them. (A benchmark is a standard or measure that is used to compare the allocation, risk, and return of a given portfolio. The comparison can be for almost any period.)

The MSCI press release reads: “The MSCI Argentina Index will be included in the MSCI Emerging Markets Index coinciding with the May 2019 Semi‐ Annual Index Review. MSCI will continue to restrict the inclusion in the index to only foreign listings of Argentinian companies, such as American Depositary Receipts, as the feedback from international institutional investors stated that higher liquidity across the domestic market is needed before considering a shift from offshore to onshore listings. MSCI will reevaluate this decision as liquidity conditions on the Buenos Aires Stock Exchange continue to improve.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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If, however, company managements start to believe that this will be a policy for six more years, then there may be an incentive to stop investing and to start laying off workers in the U.S.
impact, tariffs, economy, trump
Thursday, 21 June 2018 09:28 AM
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