Well, in a brief span of a few hours, developments in Washington and on Wall Street have sent vivid messages, including that the world may be ambling toward an “economic morass of the sort that no mere presidential tweet can fix.” The New York Times and many other media outlets are reporting similar cautions.
On Tuesday, President Trump blinked in the trade war with China, the Times says, retreating from previous plans to apply tariffs to virtually all Chinese imports on Sept. 1. The action ensures that American buyers of Chinese-made toys, smartphones and much more won’t face tariff-boosted prices this holiday season.
This caused a cheer from the stock market and led some to sense that the trade war is de-escalating and the holiday shopping season saved – the S&P 500 quickly rose 1.5% on Tuesday to a level only about 3% below its record high on July 29, but it fell sharply on Wednesday before recovering modestly on Thursday.
The bond market was less buoyant, however, and while longer-term Treasury yields rose, reflecting more optimism, the increase was slight – and they remained far below their levels of late July.
On Wednesday, the signal sent by the bond market worsened once again as the yield on 10-year Treasury bonds plunged to 1.59% by the end of trading, and at some points, fell even below the equivalent rate on two-year bonds.
This inverted yield curve was widely interpreted as a sign that bond investors foresee potential weak growth in years ahead and expect the Federal Reserve will respond by cutting interest rates. Such an indicator “has often been a harbinger of recession, though not a guarantee of one,” the Times said.
That pessimistic signal is widely seen leading to choppy markets spite of strength in some key subsectors on Thursday.
Still, these events do not bode well for the world economy, the Times thinks and in “this August of market turbulence, the shorthand explanation has been that it is a result of the trade war.”
That is true as far as it goes, but the shifts in the bond market since late July – especially on Wednesday – signal something bigger is going on. The trade war is just one piece of it.
Certainly, forestalling the latest China tariffs will help avoid a big hit to the profits of retailers and importers over the next few months—and it could help prevent American consumers from facing sticker shock during their holiday shopping.
But this is about something more consequential than a 10% tariff on iPhones, NYT says. It’s really about the widening schism between the world’s two largest economies — one that cannot be reversed with a concession on tariffs by the president or with some soybean purchases by the Chinese. This clash is increasingly becoming part of the landscape that every global business must navigate.
The same could be said about the other geopolitical fires that risk flaring up. What will be the future of Hong Kong as China responds to pro-democracy protesters there? Will Britain leave the European Union on Oct. 31 as planned, and on what terms? Can India and Pakistan avoid a devastating armed conflict over Kashmir?
Also, and the European economy may be heading toward recession; global central banks are largely at the end of the road in terms of what they can do to offset a new slump; and there is political dysfunction in many of the world’s biggest democracies that could limit their ability to respond to a new recession with fiscal policy or other tools.
Indeed, through the first half of the year, falling business investment has been a drag on American economic growth, the Times notes.
The latest developments don’t mean that a recession, or even a severe slowdown, is a certainty. The Federal Reserve still has some room to cut interest rates to try to stimulate activity and has shown it is willing to use that power. And American consumers continue to be quite resilient this year even as business spending has stumbled; perhaps that will remain true.
But events this month signal that the problems facing the world economy are more complex and intractable than the immediate reaction to the president’s trade war de-escalation might suggest. A tactical retreat here and there won’t solve the deeper problems hanging over the world economy.
Once chaos has been unleashed into the global economic system, it can be hard to reel back in.
So, we will see. The Times has nothing much to say about what it expects in the future — as it points to the growing uncertainties and talks about the potential costs of uncertainties across economies. And it seems eager to point to evidence that the administration is becoming clearer about who actually pays the cost of tariff-reliant trade policies and which policies are working which are less effective.
Still, there appears certain to be a number of crucial economic policy tests ahead for the administration and the Congress. These coming debates will be crucial, especially for market stressed producers and should be watched closely as they emerge, Washington Insider believes.
Welcome
