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Learn to Live With Trade Fears Sparking Market Chaos

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(Dollar Photo Club)

Wednesday, 21 November 2018 11:01 AM Current | Bio | Archive

The global economic outlook remains relatively good. Growth is slowing as the U.S. tax cuts from earlier this year fade away and as the European economy completes the recovery phase of the cycle and returns to a more normal growth story.

However, this is a modest slowdown from an above -trend rate of growth.

There were temporary negative distortions to growth in the third quarter in economies like Germany and Japan, but investors should understand that these are temporary.

The economic momentum story therefore does not particularly justify the recent moves in equity markets.

Macro-economic evidence, the labor market and income growth, and company evidence revenue growth from retailers point to a good level of domestic demand.

The strength of the U.S. economic position does mean that the Federal Reserve can and should raise rates in December.

The Federal Reserve exists to serve “Main Street” and should only care about “Wall Street” if Wall Street is hurting the U.S. economic outlook or is a signal of problems in the economic outlook, which is of course not the case now.

There is no reason for the Federal Reserve to be concerned about Wall Street, at least not at the moment.

President Donald Trump said he’d like to see lower interest rates from the Federal Reserve.

At the moment, neither the market nor the economic consensus would agree with that assessment.

If the economic outlook generally is OK, is there any economic justification for market volatility?

Investors will have to learn living with an increasingly “messy” outlook over trade. Because trade matters a lot to equities but only a bit to the economy, the threat that further tariff increases on trade or anything that changes market expectations about the prospects for tariff increases on trade is likely to hurt markets without making a material change in expectations for economic growth.

White House chief economic adviser Larry Kudlow said the economic indicators suggest the U.S. economy is doing very well, and he is right. He added he was nicer than other critics of Goldman Sachs about a declining GDP in 2019.

Investors did appear to like his remarks.

The Office of the United States Trade Representative (USTR) released a report updating information on its Section 301 investigation of China’s acts, policies and practices related to technology transfer, intellectual property and innovation. Ambassador Robert Lighthizer said: “This update shows that China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”

Besides, we also had another of  Trump's top economic advisers, Kevin Hassett, suggesting in an interview with the BBC there could be a case for “evicting China” from the World Trade Organization (WTO).

With the exception of what Kudlow said, the overall tone of all this is not likely to be seen as helping the prospects for China-U.S. trade.

A complication is the extent to which equity volatility and the underperformance of trade related stocks feeds not into the economy but into the policy making process ahead of the G-20 meeting in a little over a week’s time in Argentina. 

For the time being, market direction is likely to be influenced by “Trade commentary and hopes” and perhaps a refocusing on the still positive “trends” of economic growth.

The just released OECD growth forecasts for next year show that global GDP is now expected to expand by 3.5 percent in 2019, down from 3.7 percent that was expected in May. Growth is expected to remain at 3.5 percent in 2020.

In many countries, unemployment is at record lows and labor shortages are beginning to emerge. But rising risks could undermine the projected soft landing from the slowdown. Trade growth and investment have been slackening on the back of tariff hikes. Higher interest rates and an appreciating U.S. dollar have resulted in an outflow of capital from emerging economies and are weakening their currencies. Monetary and fiscal stimulus is being withdrawn progressively in the OECD area.

The OECD left its growth forecasts for the United States in 2018 and 2019 unchanged and projects U.S. growth to slow from nearly 3.0 this year to slightly above 2.0 percent in 2020, which is of course not a recession, as the impact of tax cuts are expected to wane, and higher tariffs are expected to add to business costs.

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

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Investors will have to learn living with an increasingly “messy” outlook over trade.
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Wednesday, 21 November 2018 11:01 AM
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