Tags: nafta | fed | investors | trump | trade | investors | threat

Trade Protectionism, 'Taxing' US Consumers Threaten Investors

Trade Protectionism, 'Taxing' US Consumers Threaten Investors
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By    |   Monday, 29 January 2018 07:39 AM

In the aftermath of the new U.S. consumer taxes on washing machines and solar panels, today, Monday, we’ll have the conclusion of another round of talks on the North American Free Trade Agreement (NAFTA).

One of the NAFTA points of discord is Chapter 11, which is the investment component of NAFTA. (Should not be confused with the bankruptcy filing term).

NAFTA's Chapter 11 provides businesses with predictable investment climate and a dispute settlement procedure should issues arise. The Trump administration wants the right to opt out of the binding dispute resolution panels, because it views them as an invasion of sovereignty and an incentive for companies to outsource to Mexico by guaranteeing them a forum to sue for unfair treatment.

We’ll see what comes out today.

Now, investors could do well keeping an eye on all this for the simple reason that the status of these talks cannot be ignored, although financial markets are not “yet” giving serious consideration to the idea that NAFTA as a whole may, which of course doesn’t mean will come to an end,

Ending NAFTA would probably be an exception to the general rule that politicians have very little influence over economics in the near term, but there is no doubt whatsoever that it would disrupt investment and supply chains and hurt consumers’ real disposable incomes.

Trade protectionism and the taxing of consumers implied in that, is one of the key risks to the 2018 outlook.

While the United States prepares for Fed Chair Yellen’s final FOMC meeting on Wednesday, the monthly personal income and personal consumption data is due including along with that, the PCE deflator.

The PCE deflator is touted as the Fed’s favorite inflation measure. The PCE deflator has fewer administered prices in it than does consumer price inflation (PCI).

Nonetheless, the financial markets appear to give more emphasis to consumer price inflation (CPI) than they do to the PCE deflator, perhaps because the CPI is theoretically comparable with inflation in other countries, though that too is rather dubious.

The market is expecting the headline deflator to come in at about 1.7 percent year-over-year rate (y/y), which is also the long-term average for the PCE deflator.

Over in Saudi Arabia the anti-corruption investigation seems to be drawing towards a conclusion.

There is an international relevance to these, which is not perhaps being completely considered by investors.

The assets taken by the Saudi government will be, presumably, used for some purpose, perhaps for various sovereign wealth funds. If the Saudi government uses these assets in a “different way” from their previous owners, there will be international consequences.

If overseas assets are sold to finance government spending for instance, there will capital flow and currency implications.

Over in the Euro area, ECB Governing Council member Klaas Knot, who is an economist and also current President of the Dutch central bank De Nederlandsche Bank (DNB) has said that he European Central Bank (ECB) has to end its quantitative easing as soon as possible because there is not a single reason anymore to continue with the program.

This is stern stuff, but it does seem to represent the views of what might be turned to the “northern” European faction of the ECB Governing Council.

ECB President Draghi, a man addicted to easing, is not necessarily on board with this.

Nonetheless, it does seem increasingly likely that the September conclusion of the 30 billion euro per month bond buying program may mark for conclusion of the program entirely.            

Anyway, when we look at the rise of the U.S. and German bond yields so far this year (Japanese bond yields don’t matter so far) then we could try to imagine what the yields could and probably will do, which includes of course the euro and the dollar, once the ECB stops its bond buying program.

Of course, we aren’t there yet.

Investors could also do well not to forget that ECB President Draghi leaves office next year (2019) on October 21.

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

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HansParisis
Ending NAFTA would probably be an exception to the general rule that politicians have very little influence over economics in the near term, but there is no doubt whatsoever that it would disrupt investment and supply chains and hurt consumers’ real disposable incomes.
nafta, fed, investors, trump, trade, investors, threat
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2018-39-29
Monday, 29 January 2018 07:39 AM
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