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Good morning! It’s Tuesday, so there must be more trade news: President Trump doubles down on China tariffs, China may weigh responding to a trade war with a currency war, the economic fallout is adding up … but Americans are still feeling pretty good about the economy.
GROUNDHOG DAY
President Donald Trump threatened $200 billion in tariffs on Chinese goods. That’s on top of the steel and aluminum tariffs (which barely dinged China) and $50 billion set last week. Mr. Trump was set off by Beijing’s decision to retaliate for the $50 billion tranche. The latest round would bring total Chinese imports subject to U.S. tariffs to $450 billion, almost as much as the $505 billion in goods that the U.S. imported from the country last year, William Mauldin reports. China only imported $130 billion in American goods last year, giving Beijing less room to target trade volumes coming from the U.S.
FROM TRADE WAR TO CURRENCY WAR
China has one powerful weapon with which to respond to U.S. tariffs: its tightly controlled exchange rate. After keeping the yuan cheap for years to promote exports and suppress imports, China allowed it to rise until 2014 and it is now roughly fairly valued. But if Beijing thought tariffs were going to hit growth, it could loosen monetary policy and weaken the yuan, Brad Setser of the Council on Foreign Relations notes. This might enrage Mr. Trump but it’s not clear what he could do. The U.S. could attempt to neutralize Chinese intervention with yuan buying of its own, but China could respond with tighter capital controls—though this would mean aborting its long-run plan to make the yuan globally convertible. -Greg Ip
Do you think the U.S. and China are heading into a trade war? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest news.
WHAT TO WATCH TODAY
The St. Louis Fed’s James Bullard speaks on the macroeconomics of prices and wages at the ECB’s central banking forum in Sintra, Portugal at 7 a.m. ET.
U.S. housing starts for May, out at 8:30 a.m. ET, are expected to rise to an annual pace 1.31 million.
The White House is hitting up its base. President Trump delivers remarks to the National Federation of Independent Businesses, a small-business group that supported tax cuts and has registered soaring confidence since the election. And Vice President Pence travels to Nucor Steel Auburn (about a half-hour drive from Syracuse, N.Y.’s Dinosaur Bar-B-Que). Nucor has been a big supporter of steel tariffs.
The Bank of Japan releases minutes from its April 26-27 meeting at 7:50 p.m. ET.
TOP STORIES
FALLOUT ZONE
Tariffs are a tax, raising the price of imported goods, increasing costs to consumers, and making domestic producers (who don’t face the tariff) more competitive. Tariffs on washing machines, for example, quickly resulted in higher prices for consumers. Tariffs on steel and aluminum make life harder for companies that mold or bend the raw materials into cans, springs, car panels or other products. But in the context of a roaring economy, the negative impacts could be hard to notice, Josh Zumbrun writes. The U.S. would add jobs, though perhaps not as many. The economy would grow, though perhaps not as fast. Oxford Economics’s Louis Kuijs estimates that the tariffs on $50 billion in Chinese goods, plus tariffs on $200 billion, alongside one-to-one retaliation from China, would reduce economic growth in China by about 0.3% and and in the U.S. by about 0.2% in 2019-20.
HANG UP
The Senate slapped down one of President Trump’s key concessions to China. Lawmakers voted to reinstate a ban on selling U.S. parts to Chinese telecommunications company ZTE Corp. That overturns a deal Mr. Trump made with Beijing to save the firm. The measure was wrapped in a larger, must-pass defense bill that cleared the Senate on an 85-10 vote Monday, Siobhan Hughes and Kate O’Keeffe report. The House and Senate must pass identical legislation before Mr. Trump signs a defense measure into law—or uses his veto powers—so this isn’t a done deal yet.
JUST A FRIEND
President Trump’s tough line on trade with China has finally given Japanese Prime Minister Shinzo Abe something to agree with Beijing about. After years of skirmishing with China over territory and security, Mr. Abe is promoting a rapprochement that reflects Tokyo’s need for allies in upholding the postwar free-trading system, Peter Landers reports. It’s an example of how Mr. Trump’s “America first” policy of curbing imports he says threaten the U.S. are reshaping relations around the globe.
CHART OF THE DAY: CONFIDENCE
Economic confidence among lower-income Americans has taken a leap, the latest evidence that benefits of the economic expansion are reaching a broader swath of workers. Sentiment among lower-income consumers still trails that of their higher-earning counterparts. But the gap has narrowed in recent months, Sarah Chaney reports. The University of Michigan’s consumer-sentiment index showed confidence among households in the bottom third income tier has risen 11.4 points since February. Sentiment among Americans in the highest third of incomes has fallen more than eight points.
QUOTE OF THE DAY
“I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform. However, that optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs.” – Federal Reserve Bank of Atlanta President Raphael Bostic, speaking to the Rotary Club of Savannah
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Bitcoin’s success could be its downfall. The theory: if it becomes truly valuable, bitcoin miners would steal it. “In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important—e.g., if it became a ‘store of value’ akin to gold—which suggests that there are intrinsic economic limits to how economically important it can become in the first place,” Eric Budish writes in a National Bureau of Economic Research working paper.
Marriage is a cause of inequality. Some studies have shown that assortative mating—college grads marry college grads—contributes to the growing income divide. But new research suggests that it’s not about who marries whom, but rather who doesn’t get married at all. “Marital patterns can therefore explain up to 1/3 of the observed increase in income inequality over the period considered. We then show that most of this effect comes from the “who remains single” component (95%), and that assortativeness in education contributed only very little (5%),” Arnaud Dupuy and Simon Weber write in an Institute of Labor Economics discussion paper.
UP NEXT: WEDNESDAY
The Fed’s Jerome Powell and European Central Bank’s Mario Draghi speak at an ECB central banking forum in Sintra, Portugal, at 9:30 a.m. ET.
U.S. existing home sales for May, out at 10 a.m. ET, are expected to climb to an annual pace of 5.54 million.
from Real Time Economics https://ift.tt/2tjc0Bu
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