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In today’s issue, investors rethink prospects for global economic growth, the new Fed chairman doesn’t seem too sensitive to trade risks or market volatility, the White House softens its tariff rhetoric, investors hedge their bets, Europe piles up debt, and U.S. gasoline prices are rising to the highest level since 2014.
SYNCHRONIZED GLOBAL STALL?
Here’s a sobering analysis: Investors are already grappling with the tech rout and the threat of a trade war. Now, they’re also starting to reassess a fundamental premise of the stock-market rally—that world-wide economic growth is on the verge of blasting out of a long period of weakness, Ben Eisen, Michael Wursthorn and Daniel Kruger write.
Last year, we had synchronized global growth. But recently, the comeback has been in a bit of a rut. U.S. retail sales have fallen for three straight months, construction spending decelerated, auto sales plateaued and the latest jobs report was underwhelming. Manufacturing activity was down in March in 21 of 30 countries, led by declines in Asia and Europe. There’s little fear of an imminent global recession, but the less-than-stellar numbers are forcing investors to consider that the global growth surge may be turning into a synchronized stall.
NO FED TO THE RESCUE
One reason trade fears are roiling stocks is that that the Federal Reserve is not going to bail investors out. In the last decade growth risks routinely shifted Fed monetary policy in an easier direction. But Fed chairman Jerome Powell’s speech Friday did not mention trade or the stock market as threats to growth.
“It is slowly dawning on market participants that the Fed is not particularly sensitive to equity market developments,” Krishna Guha of Evercore ISI writes. Investors will have to price in the risks of trade war and hostile technology policies with no “Fed put” to bail them out. Allianz adviser Mohamed El-Erian tweets that Powells’ speech shows “no sign of the #Fed looking to resume the approach of repressing #markets #volatility.” - Greg Ip
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WHAT TO WATCH THIS WEEK
The Congressional Budget Office at 2 p.m. ET on Monday releases its first estimate of how recent tax and spending legislation will affect U.S. deficits and economic growth.
China’s President Xi Jinping is scheduled to give a keynote address at the opening of the Boao Forum for Asia, China’s version of Davos. Watch for comments on trade and investment.
U.S. consumer, producer and import prices are all due out this week. The highlight: the U.S. consumer price index for March on Wednesday. Is inflation picking up?
China’s consumer price index for March also is due out Wednesday.
The Fed releases minutes from its last policy meeting on Wednesday.
House Ways and Means Chairman Kevin Brady (R., Texas) Thursday holds a hearing on Trump administration trade policy and its impact on the U.S. economy and jobs. Some Republicans are worried tariffs will hurt businesses in their districts.
The University of Michigan’s consumer sentiment index for April is out Friday.
TOP STORIES
WHITE HOUSE WALKS BACK TRADE RHETORIC
Here’s a little boost for markets: Trump administration officials over the weekend softened some of their rhetoric on China tariffs, noting that the penalties aren’t imminent and there is ample time to work out a deal, Peter Nicholas reports.
“I don’t expect there will be a trade war” and the U.S.’s intention is to “continue to have discussions with China,” Treasury Secretary Steven Mnuchin said on CBS’s “Face the Nation.” Lawrence Kudlow, having completed his first week on the job as National Economic Council director, emphasized that “nothing has happened so far” on “Fox News Sunday.”
SEESAW
The S&P 500, Dow Jones Industrial Average and Nasdaq Composite each fell over 2% on Friday as investors worried that tough talk on trade between the U.S. and China could threaten global economic growth. But world stocks bounced back Monday after rhetoric cooled, Riva Gold and Kenan Machado report.
Stocks in Asia mostly closed higher, the Stoxx Europe 600 edged up 0.6% midmorning and futures pointed to an opening rise for the S&P 500.
CHINA VS. JAPAN
What is the Trump administration’s playbook on trade? Bob Davis writes that the White House is looking at the U.S. trade fight against Japan in the 1980s and 1990s for lessons in its battle against China. But the two eras, and nations, are as striking for their differences as they are for their similarities.
The U.S. used section 301 of the U.S. Trade Act of 1974 to get Japan to change course. Japan accommodated. Confronted with the same tool, China is fighting back by targeting politically sensitive goods for sanctions, especially U.S. agriculture and aircraft. The idea is to make a trade war so costly, that the U.S. will back off, even if the fight harms China’s economy.
JUST IN CASE
At a minimum, policy uncertainty is fueling market volatility. So investors are a hedging their bets: In the first quarter, they pulled a net $52.13 billion from long-term mutual funds and exchange-traded funds focused on U.S. stocks while adding $80.02 billion to international-stock funds, William Power reports. Investors also are taking comfort in fixed-income investments, putting a net $74.30 billion in bond funds.
Of course, American stocks have been resilient as indexes have hit a series of records, and could continue to rise. But just in case, investors and strategists are making sure they have overseas exposure.
EUROPE PILES UP DEBT
Across the eurozone, economic optimism, ultralow interest rates and fierce competition among banks have helped push private-sector lending to its highest level since the financial crisis. That would be good news if it wasn’t for one big problem: the region’s already high debt.
Over the past decade, the debt held at eurozone firms and households rose around 12 percentage points to 160% of gross domestic product, Patricia Kowsmann and Tom Fairless report. In the same 10-year period, U.S. private-sector debt fell around 14 percentage points, to 152% of GDP.
Now, as the European Central Bank winds down easy-money policies, rising interest rates could make it harder for people and companies to borrow and serve existing debts, crimping their ability to spend and invest, while pushing some into bankruptcy.
ROAD TRIP
Americans are spending more at the pump than they have in years. Prices could rise even higher just as drivers hit the road for family vacations, Stephanie Yang reports.
“This summer, in terms of average gas prices, will likely be the highest since 2014,” said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. Crude prices have jumped thanks to continuing production cuts by major exporters. As a result, gasoline is also becoming more expensive. Average regular retail gas prices reached $2.70 a gallon last week—the highest level since 2015, the U.S. Energy Information Administration said.
CHARTS OF THE DAY: EMPLOYMENT
U.S. employers have been adding jobs for 90 straight months, a record streak that extends back to President Barack Obama‘s first term. But…
“The relative shift in the sectoral pattern of payroll growth under President Trump is very eye-catching,” said economist Philip Suttle. Manufacturing, in particular has picked up. Much of the sector’s improvement reflects a global rebound that started in 2016. “In more recent periods, however, the pattern is reflective of the shifts in policy that have occurred in the past 15 months.”
Another sign the labor market is getting tighter: The share of the population that is out of the labor force but wants a job is at the lowest level since the recession, suggesting there’s plenty of work available. (Of course, that particular data point offers no insight on the kinds of jobs available.)
TWEET OF THE DAY
WHAT ELSE WE’RE READING
One promise of Brexit: taking control of the U.K.’s borders. Unfortunately, reductions in migration following a breakup with the European Union “are likely to have a significant adverse impact on UK productivity and GDP per capita,” King’s College’s Jonathan Portes writes. “By contrast, the increase in low-skilled wages resulting from reduced migration is expected to be, if at all, relatively modest.”
What would a global trade war look like? “A full-blown trade war outside the WTO system would result in a 32-percentage point increase in the tariff protection faced by the average world exporter,” UNCTAD’s Alessandro Nicita, University of Geneva’s Marcelo Olarreaga and Kansas State University’s Peri da Silva write. The U.S. would get off a little easier, with exporters facing a 27-percentage point increase in foreign tariffs. “These outcomes suggest that a full-blown trade war would have no winner.”
Women who have their first child before 25 or after 35 eventually close the salary divide with their husbands. The New York Times writes that it’s the years in between that are most problematic—when women have their first child during that span, their pay never recovers. “The years between 25 to 35 happen to be both the prime career-building years and the years when most women have children.”
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