US Trade Deficit
President Trump has not tweeted a preview of the trade deficit number yet. One month’s data does not make a trend of course, but there is a heightened interest in financial markets in this number given the political focus on trade.
The expectation is for a modest increase in the scale of the US trade deficit. The current economic policy of the United States is skewed towards increasing the size of the deficit. The estimates are that over a third of the tax cuts this year will be spend on imports, and the tax cuts are now starting to hit the economy.
The trade deficit matters because it matters to the US administration. Whether it matters politically in the country at large is a different question. It seems unlikely that the wider electorate knows what the size of the US trade deficit is, but the general population responds to the utterly incorrect idea that running a trade deficit is automatically a bad thing and should be reduced. Whether the deficit actually is reduced or not may not matter that much to voters.
Meanwhile, President Trump appears to have retreated from some of the more extreme threats made against Chinese investment into the United States.
For now, we know that within the administration, officials have disagreed over how to limit investment.
Mnuchin favors using the Committee on Foreign Investment (CFIUS) in the US, which reviews foreign acquisitions of US companies for national security risks.
Trump said: “We have the greatest technology in the world, people copy it and they steal it, but we have the great scientists, we have the great brains, and we have to protect that, and that can be done through CFIUS, we have a lot of things we can do it through.”
Meanwhile, Congress is working on legislation to expand the mandate for CFIUS. If passed, foreign investors seeking to buy U.S. companies would face higher hurdles for regulatory approval.
Others favor a more aggressive approach: declaring an economic emergency and invoking a little-used 1977 law called the International Emergency Economic Powers Act.
This can still be spun as restriction to the general population without being as alarming as had been feared by the financial markets.
However, financial markets have learned to be cautious of putting too much faith in pronouncements from President Trump, and the apparent “softening” of the position has not led to a noticeably positive reaction in the Asian financial markets.
Besides all that, the trump Twitter feed has also been quite vocal on EU cars tariffs.
His tweet reads:
“....We are finishing our study of Tariffs on cars from the E.U. in that they have long taken advantage of the U.S. in the form of Trade Barriers and Tariffs. In the end it will all even out - and it won’t take very long!”
With now the threats of action of a so-called trade war moving slowly into the phase of real tariffs actions, whether it is from the US, the EU, China, Canada, etc. on steel as well as a variety of other products, there is no doubt that this going to start weighing bit-by-bit on global economic activity and finally on economic growth.
That will be one of the main concerns for the broader as well as the emerging markets, especially as this all comes at a time when growth was already starting to roll over. When we add to that tighter financial conditions induced by the Federal Reserve we have come to a stage where we have heightened market nervousness, particularly in the emerging markets space.
So, how can an investor live through this kind of situation and still make positive returns?
My answer is, at least for the time being, investors have little chance of being wrong by being/going “long” the US dollar, also when we look at it from a cyclical as well as a structural prospect.
The growth cycle in the US continuous to perform very well, inflation remains around the Fed’s target and the Fed is not going to change its policy anytime soon and certainly not in a more dovish direction. That puts the Fed on the complete opposite side of the major other central banks in the world.
Emerging markets (em) under these conditions remain very vulnerable and therefore I wouldn’t invest in emerging markets for the time being.
Being patient and staying in liquid US dollar-based vehicles like US Treasuries will be the message.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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