Trade Wars and Rumors of Trade Wars Can Be Problematic

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Rumors of trade wars are always problematic since they slow growth and capital flows and exacerbate problems. So it is important to see how the world economy is faring as the situation develops. Early PMI prints for the US, France and Germany were below expectations though the Eurozone was spot on. It is important to note that PMIs are still at high levels, well off the lows of 2016. US data have been very strong, but uncertainty generated by trade could hit the rebound’s “animal spirits” channel. The economy seemingly is going from strength to strength: claims edged to near 50-year lows; new home sales were up 6.7% in May and beat the consensus; the LEI rose 6.1% YoY. The upside risk of a 3+% Q2 continues to be mooted with Atlanta Fed GDPNow holding at 4.7%, though the St. Louis Fed is at 3.4% with the New York Fed at a more modest 2.9%. Much on the print will depend on net exports (C + I + G +(X –M)); either way it’s a strong quarter and 4% is not out of the question.

It’s a solid outlook but the direct effects of trade war uncertainty are drag enough. Fed Chair Powell is warning that trade uncertainty is a risk for investment and powerful enough for the Fed to “cause us to question the outlook.” The ECB chief Draghi echoed concern over higher uncertainty hitting the economy. Most straight forward was RBA chief Lowe who warned, “while the tariffs themselves might not derail the global economic recovery, the fallout could be magnified through financial markets,” and “I believe this is happening and is incredibly worrying.” H/T to Dr. Thierry Wizman of Macquarie, who notes that the global auto trade is especially at risk. - Special Guest Blogger: Tim Kearney, PhD

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