While summer may be upon us, the news is not taking a vacation as this week proved to be packed with headline-hitting stories. Where are U.S. and Europe’s relations headed? What of the Chinese economic hard landing that so many investors feared in 2016? And what updates surround the Brexit as the June 8th election gets closer. Learn more in this week’s Steady Investor’s Week…
Chilling Relations with Europe – U.S./Europe relations appear to be on a cooling path, with President Trump criticizing Germany for selling too many vehicles in the U.S. and thus contributing to an undesirable trade surplus. Trump also did not explicitly pledge defense alliance as part of NATO, though he reiterated his assertion that other countries need to pay their fair share. Trump was also the only leader of the G-7 not to pledge support for the Paris Accord while overseas in Italy. Taken together, this has led to some doubts amongst European leaders over the kind of economic and defense ally they may have in the U.S., and it has led to some retaliatory statements as European politicians posture to stand up to the U.S. or take matters into their own hands. The German Chancellor issued the strongest statement of all, stating that Europe “must really take our fate into our own hands.” President Trump indicated to some degree that he would consider blocking German car exports to the U.S., and took it a step further by threatening a 35% import duty for foreign-built cars sold in the U.S. This tough trade talk is a slippery slope, as many foreign cars like Toyota and BMW are actually manufactured in great numbers in the U.S. In other words, we are not the only ones with leverage in this negotiation. A trade war is the worst possible outcome.
What Hard Landing? – for all the fears of a Chinese economic hard landing that permeated investor fears in early 2016, there has been no real sign of economic trouble from the world’s second largest economy. Recently posted manufacturing and services numbers showed steady expansion, with investment in construction and infrastructure contributing solidly to the broad economic growth. According to state figures, China’s manufacturing PMI held steady at 51.2, which marks almost a year of expansionary readings. Nonmanufacturing PMI displayed similarly with consistent strength, rising from 54.0 to 54.5.
Brexit – we are entering a critical few weeks for Britain, as Prime Minister, Theresa May, stares down a June 8 election that could determine if she wins enough seats to form a government – or whether she will need to cooperate with moderates who are still bitter over the Brexit outcome. Europe has kept its promise of running tough negotiations, frustrating just about every Brexiter in the British government. Theresa May said this week that “no deal is better than a bad deal,” but that perspective will not realistically help Britain economically move forward. Mark your calendars for the June 8 elections.
Mixed Messages from the Fed – Federal Reserve presidents hit the stumps this week, in a slew of speeches that gave some clues about future interest rate policies. Perhaps the biggest discrepancy in dovish vs. hawkish views came between San Francisco Fed President John Williams and St. Louis Fed President James Bullard. Williams argued for three rate hikes this year, in very boring and matter-of-fact fashion. He also argues for a transparent Fed that sticks to its messaging so as not to confuse markets. One of his statements reflecting that view, as he said “the more public understanding there is, the lesser the risk of market disruption and volatility.” Meanwhile, St. Louis President Bullard cited fears of the U.S.’s meager inflation path, coming close to comparing it with Japan’s experience in the 1990’s, though not quite that severe. His view is that the Fed should be in no rush to raise rates in such a low inflation environment, and raising rates too quickly and by too much could lead to a negative economic outcome. Time will tell.
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