Here is what Julex Capital recently wrote about the escalated trade tension between the US and China…
After two relative quiet months, the trade tensions between the US and China have escalated again. Frustrated by no progress in the trade talks, President Trump tweeted that he would impose 10% tariff on the rest of $300 billion Chinese exports on September 1st. China retaliated by suspending importing US agriculture goods and letting the Chinese Yuan depreciate below 7 CNY/USD, a sensitive threshold. This new round of escalation has dimmed the hope of any trade deal in the near term. Global stocks tumbled in last few days.
Although we are not optimistic about any quick resolution on the trade disputes, we believe the trade tensions may have more impacts on the market sentiment than on the real economy. Here are our two thoughts:
(1) US economic indicators remain solid despite the uncertainties on trades. Since the trade war started last March, we have not seen any significant deterioration of US economic performance. The second quarter US GDP grew at a 2.1% annualized rate. Job market continues to be strong, adding 164K jobs in July. Unemployment rate remains at 3.7%, a 50-year low. The forward-looking survey indicators like PMI show continued economic expansion though at a slower pace.
(2) Inflation rate remains subdued. According to the conventional wisdom, tariffs normally drive import prices, and thus inflation higher. That has not materialized yet. The latest US core CPI excluding food and energy rose at a 1.63% annualized rate, and PCE inflation rate was 1.60%, well below the 2% target the Fed tries to maintain. The devaluation of the Chinese Yuan and decrease of Chinese imports could have limited the impacts of tariffs on consumer prices. Since last March when the trade war started, the Chinese Yuan has depreciated by 10%. The first six-month imports from China declined to $219.1 billion, which was $30 billion lower than the same period last year. The low inflation rate will give the Fed some breathing room to reduce interest rates to stimulate economic growth if it needs to.
We expect to see more market volatility going forward as the trade tensions continue to appear on the news headlines, but impacts of trade war on the real economy may not be as bad as many people had thought.