The Federal Open Market Committee (FOMC) Meeting

The Federal Reserve is the second of the world’s major central banks to meet this week. The Fed’s policy is transparent, and the body says what it’s going to do slowly and clearly, and then it does it.

Today’s meeting is not the meeting to raise rates; that comes at the next meeting on September 25-26. The focus is not therefore on the monetary policy outcome of today’s meeting, but any statements about the longer-term outlook. What happens after the rate rise of the next meeting?

For this, there are obviously many considerations, not least of which is the burden of consumer tax (tariffs) increases being imposed by President Trump.

These could slow the economy down in the United States during the fourth quarter, which might be a worry for the Federal Reserve.

No doubt, tariffs will also raise inflation in the short term.

But for now, the focus is going to be on the strength of the U.S. labor market and the need to normalize monetary policy in a world of normal economic activities and normal inflation.

US Tariffs on China

There are reports that the Trump administration is considering more than doubling its planned tariffs on $200 billion in Chinese imports and thus hereby increase the tax (tariff) burden on U.S. consumers of goods "partially" made in China.

At the same time, representatives of U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are having private conversations as they look for ways to reengage in negotiations.

While the conflict nominally centers around the U.S.’s $375 billion annual goods trade deficit with China, it has morphed into a chapter in the nations’ broader strategic rivalry.

China’s Ministry of Foreign Affairs spokesman Geng Shuang said at a regular press conference yesterday: “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests.”

In a sign the trade standoff is reverberating through Chinese politics, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth amid risks from a campaign to reduce debt and the dispute with Trump.

Maybe, part that all this has also come that far because the 10 percent tax (tariff) rate is generally being evaded.

Fact is that a 25 percent tax (tariff) rate would be more difficult to evade, while putting the yoke of taxation through the 25 percent tariffs on U.S. consumers, which would be proportionally greater than the 10 percent to 25 percent shift at first sight might seem to imply.

Eurozone Manufacturing Purchasing Managers' Index (PMI)

From the Euro area we got today the final data of the IHS Markit Eurozone Manufacturing Purchasing Managers' Index (PMI), which showed that manufacturing growth remained subdued at start of the third quarter.

The past two months have seen the most subdued spell of factory output growth since late-2016, and worse may be to come.

The reduced rate of output growth continued to outpace order book growth, resulting in the smallest rise in order book backlogs for two years.

Clues to the current soft patch lie in the export growth trend, which has deteriorated dramatically since the start of the year across all Euro area member states to reach a near-two year low. The slowdown likely reflects worries about trade wars, tariffs and rising prices, as well as general uncertainty about the economic outlook.

Investment in Emerging Markets

Is the tide finally turning for emerging markets after a bruising start to the year? An increasing number of analysts say yes.

A jolt higher in the U.S. dollar, rising Treasury yields, swelling trade tensions and signs of slowing in China have conspired to dent the appeal of EM assets.

Now, according to Goldman Sachs Asset Management, emerging-market sovereign and corporate bonds offer some of the best buying opportunities in the fixed-income universe after this year’s selloff. Goldman is more skewed toward sovereign notes and is “cautious” on credit.

Morgan Stanley is in the opposing camp and views the recent bounce-back as a “bear-market rally.”

While there’s undoubtfully value in emerging-market credit, investors need to be selective as many companies are ratcheting up debt levels.

The people at Morgan Stanley think corporates are a reasonable place to invest as long as:

• The current growth cycle is maintained.
• We have that growth in the US.
• A recession is not on the horizon.

No doubt, EM investing will always be challenging.

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