Market Week in Review

Markets tumble as Trump announces sweeping tariffs on China

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Sam Templeton, manager, global communications, discussed market reaction to the Trump administration’s announcement on Chinese tariffs.

Trade tensions ramp up after U.S. releases details of Chinese tariffs

On March 22, President Donald Trump formally announced that $50 billion in tariffs will be imposed on Chinese products imported to the U.S. The announcement marked a significant escalation in the trade tensions between the U.S. and China, Eitelman said—and reaction from global markets was swift. The S&P 500® Index plummeted 3% from its weekly high (as of midday on March 22), with the MSCI Emerging Markets Index slumping 2%. Why the strong reaction? “The U.S. and China are the two most important engines of global growth,” Eitelman explained—“and the uncertainty and tension around the tariffs are a lot for markets to digest.”

Moving forward, the U.S. will have roughly 15 days to identify the exact Chinese goods it plans to levy tariffs on, Eitelman said—with the final details expected to come from the Treasury Department in 60 days. “This makes the imposition of the tariffs a bit of a drawn-out process,” he noted, adding that for markets, the biggest watchpoint will be how China responds.

Takeaways from the Fed’s latest interest rate increase

With newly-minted chair Jerome Powell at the helm, the U.S. Federal Reserve (the Fed) increased interest rates on March 21—for the sixth time since the country’s economic expansion began. “It certainly feels like the Fed has built up a rhythm to its rate-hiking process,” Eitelman said—“as the central bank has now hiked or taken a tightening step at every quarterly press conference meeting since December of 2016.”

The most important takeaway for investors, in Eitelman’s opinion, is the Fed’s rosier view on the nation’s economy. The central bank characterized its economic outlook as having strengthened, he said—an important change from December, in his mind. “Consistent with this, the Fed upgraded its guidance around the future pace of rate increases—with the FOMC (Federal Open Market Committee) now apparently torn between three or four rate hikes in 2018,” Eitelman said. At the FOMC’s last meeting in December, the consensus among members had been for only three rate increases this year, he explained.  In Eitelman’s viewpoint, yesterday’s announcement marks a bit of a hawkish shift for the central bank. “Ultimately, this reflects the idea that the Fed believes that the new tax cuts, coupled with some of the pro-growth policies from Congress outlined in the February budget deal, could ramp up economic growth in the near-term—and with that, they feel the need to respond and raise rates,” he concluded.

Is global economic growth slowing down?

Zooming out to the global economy at large, Eitelman noted that up until recently, strong growth had been the rule of thumb since mid-2016. “It’s just been in the last couple of months that we’ve started seeing signs that the rapid-fire growth may be coming to an end,” he said. As evidence, he pointed to the latest Purchasing Managers’ Index™ (PMI) data from the U.S., Europe and Japan. “The numbers for March were on the softer side—in other words, indicative of a moderation in economic growth,” Eitelman explained.

So, is there any reason for alarm? “I really don’t think so,” he said, emphasizing that in his mind, the data is consistent with a moderation from very healthy growth rates to something a bit more stable.

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