Tariff Lamentations

The mirage of a new trade regime with China has dissipated. Both sides are beating their chests in a show of strength through tariffs and a disregard for unintended consequences. A confident spirit lives within both sides as global stock markets have rebounded from the December lows giving trade negotiators a shot of courage.

However, the markets have a will of their own and show no quarter to those that rock the boat. Remember when the Fed raised rates last October? Remember when they reversed course in December? I expect nothing less of the markets so don’t be surprised if a downside move begins that brings all parties back to the negotiating table. The trade battle with China may be worth it over the long term but it will impact GDP growth and inject more volatility in the financial markets.

As you can see below, the S&P 500 index (SPX) bounced in December and has experienced only a couple of minor pullbacks since a high achieved earlier this month. We broke a bearish wedge pattern (yellow lines) and are now in what may be the early stages of a larger correction in the coming weeks. The S&P 500 worked off an oversold condition this week so the door is open to further declines. If we break 2,818 in the chart then a move down to the 2,700 area would be the next area of support. There was some signs of weakness on the close on Friday so don’t be surprised to see a weak open to start next week.

Chart of the Week!

I think these assets have satisfied the Fed’s 2% inflation target.

Economic & Central Banking Snippets 

  • The U.S. economy got off to a sluggish start in the second quarter. Both consumers and manufacturers pulled back in April amid trade tensions, a global slowdown and waning effects of the 2017 tax cuts. Retail sales fell, driven by declines in electronics, home improvement, motor vehicles, auto parts and at online shopping businesses.
  • The Cass Freight Index for shipments, a closely watched measure of freight demand, spent its fifth straight month in negative territory. 
  • Escalating trade tensions have pounded the Chinese yuan. The swoon puts Beijing in a tricky spot. A weaker currency makes Chinese goods cheaper for U.S. buyers, helping offset the impact of higher tariffs. But China doesn’t want currency depreciation to spur an exodus of capital—and further exchange-rate weakness. So far, Beijing has been unwilling to let the yuan fall below 7 to the dollar. (WSJ)
  • US industrial output unexpectedly fell for the third time in the last four months. Industrial production, a gauge of output from factories, mines and utilities, declined 0.5% month-on-month in April, the Federal Reserve said. This comes after the Institute for Supply Management reported in April that US manufacturing grew at its weakest level in 2+ years.
  • Singapore’s April non oil exports fell 10% y/o/y, about twice the estimate of a drop of 4.6%.
  • Indonesia’s exports in April fell 13.1% y/o/y, more than the expectations of a 7.1% decline.
  • Chinese retail sales rose 7.2% y/o/y in April which is the slowest pace of gain since 2003.
  • If there is a particular area of global weakness it is in the auto sector. Total European car registrations in April fell .4% y/o/y which is the 8th straight month of y/o/y declines. (Block Report)

Macro Snippets

  • The next stage of Brexit drama is set for the beginning of June, when Theresa May finally brings her divorce deal back to Parliament. No sign of an agreement has yet been seen following seven weeks of talks that have infuriated her own party. If the bill is defeated for a fourth time, she can’t bring it back again without ending this parliamentary session, meaning its defeat would almost certainly result in a new prime minister.
  • Corporate stock buyback programs continue to prop up the stock market:
  • The Trump administration has reached agreements with Canada and Mexico that end U.S.-imposed tariffs on steel and aluminum imports, removing a major barrier to the three countries’ new trade pact. Expect this legislation to pass Congress soon.
  • China plans to raise tariffs on $60B of US goods up to as high as 25% starting June 1st. Beijing’s move comes as a response to increased tariffs on $200B of Chinese goods. (FT)
  • Amazon will pay its employees to quit and will help them start their own local package-delivery businesses, as the e-commerce giant competes for delivery drivers in the tightest U.S. labor market in 50 years. Demand for so-called last-mile delivery is booming as more Americans shop online. (WSJ)
  • Foxconn, the electronics manufacturer, reported a 17.7% year-on-year drop in profits in the first quarter after several months of weak smartphone growth. Many of the Taiwanese companies that dominate the global electronics supply chain are suffering from waning consumer demand. (FT)

That is all for now until next week’s Market Update. Thanks for reading!


Paul J. McCarthy, III

President – Kisco Capital


Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.