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In today’s issue, trade tensions and Twitter broadsides rattle markets, tariffs may be pushing some prices higher, China hits U.S. farmers, tighter lending standards may be squeezing consumers, foreign demand for U.S. bonds helps keep interest rates in check, and how the U.S. produces more steel with fewer workers.
MARKET JITTERS
A possible trade war between the U.S. and China alongside President Donald Trump’s Twitter broadsides against Amazon.com weighed on tech stocks and dragged down markets.
The Nasdaq Composite fell 2.7% and the S&P 500 2.2% Monday, the first day back after U.S. stocks’ worst quarterly performance since mid-2015, Gregor Stuart Hunter reports. On Tuesday, the Nikkei Stock Average and Hong Kong’s Hang Seng Index also fell, though U.S. stocks were poised to stabilize.
The U.S. and China have exchanged tit-for-tat tariffs but many economists expect the the sides to negotiate a commercial truce. “That said, we still think trade war-mongering is the main source of downside risk for growth in the year ahead,” said Jim O’Sullivan, chief economist at High Frequency Economics.
FACTORIES STILL HUMMING
U.S. trade rhetoric and tariffs on steel and aluminum may have roiled markets but they haven’t dented underlying economic growth, at least not yet.
U.S. factories reported robust demand for their products in March but say rising prices for materials, tied to new tariffs, threaten to hobble the industry. The Institute for Supply Management’s index of factory activity remained well into expansion territory, though its index of prices rose to its highest level since April 2011, Josh Mitchell reports.
“Higher prices and trade-related uncertainty could act to slow global demand for U.S. manufactured goods, and could partially offset the boost to U.S. economic growth expected from tax reform and fiscal stimulus,” said Fotios Raptis, senior economist at TD Economics.
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WHAT TO WATCH TODAY
U.S. auto sales for March are due out Tuesday. Economists expect an annual rate of 16.9 million, down slightly from the prior month’s 17.08 million. Light vehicle sales peaked in 2016 but have since cooled, most recently because of tightening credit conditions, higher interest rates and stingy discounts.
General Motors plans to abandon the decades-old practice of reporting monthly auto sales, throwing a wrench into the calculations, though not before Tuesday’s numbers are out. Auto sales are one of America’s bedrock businesses and a consistent bellwether for consumer behavior.
Also on Tuesday, the Minneapolis Fed’s Neel Kashkari speaks at a regional economic forum at 8:30 a.m. ET and Fed governor Lael Brainard speaks on financial stability at 4:30 p.m. ET.
TOP STORIES
WINNERS AND LOSERS
Escalating trade tensions between Beijing and Washington are creating a growing list of winners and losers across the U.S. economy. In the loser’s column: agriculture and industries that consume steel and aluminum.
China announced tariffs of as much as 25% on American pork and eight other kinds of goods, as well as 15% tariffs on fruit and 120 types of commodities, retaliation for the steel and aluminum tariffs imposed by the Trump administration, Joshua Zumbrun, Jacob Bunge and Jesse Newman report.
TIGHTER LENDING STANDARDS SQUEEZE CONSUMERS
Weak consumer spending in recent months has puzzled Wall Street. Personal-consumption expenditures, a broad measure of household spending, rose just 0.2% in both January and February, slower than a 0.4% rise in personal incomes in both months.
Why isn’t spending stronger? It may be partly due to distortions from last year’s hurricane season. But, in a recent note, Cantor Fitzgerald strategists said that tightened lending standards by credit card, auto and other lenders may also be squeezing consumer finances, Aaron Back writes.
Since 2011, the Federal Reserve’s quarterly senior loan officer survey had consistently found a net loosening of credit standards on consumer loans and credit cards. That began to shift at the end of 2016. More respondents said they tightened standards than not in four of the past five quarterly surveys.
FOREIGN INVESTORS SNAP UP TREASURYS
Here’s good news for interest rates. A surge in demand for U.S. government debt from foreign investors is providing a bulwark against a further rise in Treasury yields.
Foreign investors in February bought their largest share of Treasury notes and bonds in U.S. government debt auctions since May 2016, Daniel Kruger reports. Those purchases continued even while Treasury yields were climbing to multiyear highs as as the U.S. ramped up bond sales to fund tax cuts and increased government spending.
Rising bond yields can hurt stocks and curtail investment by increasing the borrowing costs for consumers and companies.
CHARTS OF THE DAY
Trade competition is one factor behind a drop in manufacturing employment. But it’s also a story of automation as manufacturers produce more with fewer workers. Look at the sectors most affected by steel and aluminum tariffs. Primary metal production—from steel mills, aluminum factories, foundries and the like—is higher than when George H.W. Bush was in the White House. Employment is down by 44%.
Fabricated metal production—forging, stamping, bending and machining—is up almost 24% in that span. Employment is down 9%.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
“If you told me there’s 1,000 refugees who need work and want work, I could find them work this month,” says East Coast Labor Solutions’s Ray Wiley. The New York Times profiles the labor recruiter and his efforts to help companies fill jobs in out-of-way places, with low pay and disagreeable conditions (think meat processing and lumber mills). It’s an interesting window into a labor market marked by low unemployment but also pressure to keep wages down.
The manufacturing sector’s decline in the 2000s had large and persistent negative effects on local employment rates, hours worked and wages—especially for less-educated workers. “We also show that declining local manufacturing employment is related to rising local opioid use and deaths,” the University of Chicago’s Kerwin Kofi Charles, Erik Hurst and Mariel Schwartz write. Unfortunately, tariffs and other trade barriers meant to promote the manufacturing sector will have only a modest labor market impact for less educated individuals.
UP NEXT
The eurozone consumer price index for March, out at 5 a.m. ET on Wednesday, is expected to rise 1.4% from a year earlier, up from 1.1% the previous month. That could give the European Central Bank a little more confidence that inflation will reach its target of just below 2%, although not this year.
Eurozone unemployment figures for February, out at 5 a.m. ET, are expected to post another decline.
ADP’s U.S. jobs report for March, out at 8:15 a.m. ET, is expected to show a net gain of 200,000 for private-sector payrolls, a slowdown from the prior month’s 235,000 increase but still a healthy gain for the labor market.
The Institute for Supply Management’s nonmanufacturing index for March, out at 10:00 a.m. ET, is expected to slip to 59.0 from 59.5 the prior month. That’s still well into expansion territory for the services sector.
U.S. factory orders for February, out at 10 a.m. ET, are expected to increase 1.7% from a month earlier.
There’s also a dose of Federal Reserve commentary on Wednesday, with the St. Louis Fed’s James Bullard speaking on the economy and monetary policy at 9:45 a.m. ET, and the Cleveland Fed’s Loretta Mester speaking on diversity in economics at 11 a.m. ET.
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