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Trump Tweeting Presidential Policy Decisions Unnerves Investors

Trump Tweeting Presidential Policy Decisions Unnerves Investors

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Tuesday, 01 May 2018 09:06 AM Current | Bio | Archive

Most of Europe, Asia and Latin America today are celebrating their work ethic by taking the day off.

Today in the Anglo-Saxon world, things carry on as usual.

Americans have May 28 off because of Memorial Day and will celebrate Labor Day in September. Meanwhile, the British have two bank holidays this month, May 7 and May 28.

Turning to the White House, President Donald Trump has postponed the imposition of steel and aluminum tariffs on Canada, the European Union (EU) and Mexico until June 1, and has reached agreements for permanent exemptions for Argentina, Australia and Brazil.

The White House stated: “The administration is also extending negotiations with Canada, Mexico, and the European Union for a final 30 days. In all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security.”

Trump has also granted a permanent exemption on steel tariffs to South Korea as part of a revision of a free trade pact that he sharply criticized.

There are no further extensions under consideration beyond June 1 to stave off tariffs.

It might be interesting to take note that Trump administration officials have said that in lieu of tariffs, steel- and aluminum-exporting countries would have to agree to quotas designed to achieve similar protections for U.S. producers.

So, it’s certainly not an overstatement to say that there have been suggestions about resurrecting the idea of voluntary export quotas or voluntary export restrictions, which are government-imposed limits on the quantity of some category of goods that can be exported to a specified country during a specified period of time. They are sometimes referred to as 'Export Visas.'

Canada, Mexico and the European Union have all already insisted they will not accept quotas to gain permanent exemptions from the U.S. tariffs.

The European Commission has said that the extension of the temporary exemption prolonged market uncertainty, which was already affecting business decisions. If the EU is subject to tariffs on the 6.4 billion euros (about $7.7 billion) of the metals it exports annually to the United States, it has said it will set its own duties on 2.8 billion euros (about $3.4 billion) of U.S. exports of products ranging from makeup to motorcycles.

Yes, all this looks somewhat confusing and the decision-making process a little bit muddled.

Either way, policy making by tweet lacks established rules and introduces an element of randomness that financial market investors tend not to like. Real world investors tend not being very happy about such randomness, either.

For the Federal Reserve, the risk of a more aggressive trade conflict is not something that has seemingly been very high on the FOMC’s agenda. Of themselves, the Trump trade tariffs (taxes) are not especially inflationary.

Other forces are also pushing inflation somewhat higher.

The personal consumer expenditure deflator has been rising on both the headline and core measures, which in fact was not unexpected as pricing power is returning to companies and cost pressures are slowly building.

The U.S. consumer also seems relatively happy to spend as the recent data show.

This is all consistent with a quarter point of monetary policy tightening at the FOMC meeting next month on June 12-13 that will come with a Summary of Economic Projections and a press conference by Fed Chairman Jerome Powell.

Investors shouldn’t expect a change in the Fed funds rate to be announced tomorrow.

That said, when the Fed funds rate is raised next month, that would then confirm the path to 2.5 percent nominal and roughly 0 percent (zero) “real” Fed funds interest rates by the end of the year.

Technically speaking, by the end of the year, the “real” Fed funds rate is expected to be close to equal to what’s called “r*”, r* being the 'natural' rate of interest that is supposed to be neither stimulative nor restrictive.

Today in the United States, we have also April 2018 Manufacturing ISM that for March printed 59.3 percent.

Now, investors could do well taking note that since 2010:

  • the ISM manufacturing output index has had a negative correlation with actual manufacturing output;
  • the ISM employment index has had a negative correlation with actual manufacturing employment;
  • the ISM inventories index has had a negative correlation with actual manufacturing inventories,

Unsurprisingly, a rational investor might question the usefulness of the ISM manufacturing index.

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

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Either way, policy making by tweet lacks established rules and introduces an element of randomness that financial market investors tend not to like. Real world investors tend not being very happy about such randomness either.
trump, tweet, policy, investors
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2018-06-01
Tuesday, 01 May 2018 09:06 AM
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