Market Brief – Friday 5/10/19

The Trump Administration increased the tariffs on $200 billion of Chinese goods from 10% to 25% at midnight. The initial reaction from the stock market was very benign as investors remained hopeful that today’s meeting would result in a cancellation of the increased tariffs. While the tariffs are now in effect, they will not apply to any shipments that are in route to the United States, so the full effect will not be for three to four weeks.

Chinese businesses who focus on exporting products to the United States mentioned last night in an interview that they would most likely be forced out of business as it would take too long to retool their products for use in other parts of the world. The tariffs will hurt Chinese businesses and the Chinese government is expected to respond in kind, although nobody knows what the policy response will be.

President Trump tweeted this morning that the increased revenue from the tariffs, which will ultimately be borne by American consumers and not Chinese business, will be used to purchase agricultural commodities to support humanitarian missions in other countries. President Trump has instructed his staff to put together a proposal that would have the United States government purchasing more agricultural commodities than China did. Such a move would be very beneficial for American farmers.

From an economic standpoint, the United States should expect a -0.5% decrease to its GDP growth in the coming quarters. Consumer prices should rise and demand, which is already weakening, should further fall. With consumer prices being held artificially high due to tariffs, the Fed will have a challenging time managing monetary policy.

From a global economic perspective, World Dollar Liquidity should continue to contract which means the global economy will continue contracting. Aside from the U.S. stock market, which seemingly is ignoring everything, asset prices and interest rates should fall.

The Consumer Price Index (CPI) rose +2.0% on an annualized basis, just under expectations of a +2.1% print, which is right on target for the Fed’s two-percent inflation target. Consumer goods prices are falling while shelter and services prices are increasing.

Stocks shrugged off the increased tariffs as hope remains eternal for a trade deal, but in the last minutes of trading, both sides stated there are no further meetings scheduled. Investors chasing stocks higher are soon going to find out that China will retaliate against the tariffs.

Treasury yields closed flat on the day and are poised to break lower and the next move lower should be rapid. Investors also believe inflation is right around the corner, even though the global money supply is slightly contracting. Increased tariffs and a slowing global economy will lead to lower long-term yields.

Physical gold continues to find sellers just below its 50-day moving average and it is still poised to move lower. The large gold miners, when they fall, should set up an excellent long-term buying opportunity.

Should the United States government start buying agricultural commodities, and I believe President Trump will make good on his word since he promised farmers help, it will be a big boom for one of the most heavily shorted sectors in the economy which is also at its multi-decade lows.

For now, the world waits to see how China will respond and be prepared, they will.