Aug 2, 2019

Axios Markets

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Situational awareness:

  • July's U.S. non-farm payrolls report will be released at 8:30 a.m. ET, with Wall Street analysts expecting 165,000 jobs added, a 0.2% pickup in hourly earnings and a drop in the unemployment rate to 3.6%. (NYT)
1 big thing: The forever trade war

Illustration: Aïda Amer/Axios

Experts are beginning to worry that the trade war between the U.S. and China won't be over in weeks or even months, but has become a long-term conflict that could last for decades.

  • Why it matters: Bullish investors have priced a near-term positive outcome into record-high stock prices, but a growing chorus of money managers and economists says the conflict's resolution could take a very long time.

Driving the news: President Trump tweeted on Thursday that the U.S. would put an additional tariff of 10% on $300 billion worth of Chinese goods on Sept. 1, again escalating the conflict that has already weakened U.S. growth and business investment.

What's happening: Even before Trump’s latest tweets, ratings firm S&P Global had revised down its outlook for U.S. GDP growth through 2022, because "the risk of trade protectionism between the U.S. and China will persist for some time."

  • Citing "an intensifying multi-front trade war," chief economist Beth Ann Bovino wrote: "A sharper-than-expected slowdown in China and Europe, and uncertainties stemming from Brexit, add to the downside risk."
  • While headlines have focused on tariffs and trade, the real story is about the economic clash between the world’s 2 largest economies, Bovino tells Axios. "The fight over who’s in charge in the new technological world, that doesn’t seem to have any end in sight."

Go deeper: Read the full story

2. For retailers, this time it's personal

Retail company shares were among the hardest stocks hit on Thursday after Trump's tariff announcement.

  • Best Buy shares fell nearly 11%, Gap and Kohl's dropped by almost 8% and Nordstrom stock ended the day nearly 7% lower.

Why it matters: While previous tariffs targeted mainly inputs, or components of consumer goods, the new tariffs will apply largely to things people buy directly. That will raise the cost of everyday purchases and force retailers to either increase prices or eat the cost of the tariffs, putting pressure on their margins.

By the numbers:

What they're saying: "The list of products these tariffs will hit are almost entirely consumer oriented," said the Retail Industry Leaders Association in a statement. "This new 10% tariff on Chinese imports is a direct hit on consumer products and family budgets, plain and simple."

  • "The tariffs imposed over the past year haven’t worked, and there’s no evidence another tax increase on American businesses and consumers will yield new results," the National Retail Federation said in a statement.

What's next? A report from Citi released in May estimated additional tariffs on the list of $300 billion worth of Chinese goods would be much worse for consumers than previous tariffs.

  • Goods included will represent 67% of total imports of consumer goods from China — as well as 66% of vehicles, 19% of industrial supplies and 38% of capital goods.

What to watch: Economists tell Axios that Trump's tariff announcement looks more like an attempt to sway the Fed into interest rate cuts than anything else.

  • Based on his previous tariff threats against Mexico that were quickly backtracked, there's worry the president is using Twitter more to manipulate those he sees as adversaries than to alert policy.
3. The trade war is punishing EM equities
Expand chart
Data: Haver, IIF; Chart: Axios Visuals

Despite a dovish Fed and a global easing cycle, investors continue to pull money out of emerging market equities, data from the Institute of International Finance shows, and it's largely because of trade war fears.

Driving the news: Net capital flows to EM totaled -$35.8 billion in June, continuing a negative trend from May that saw net outflows of $19 billion. Net outflows were primarily driven by China, which more than erased Saudi Arabia’s large inflows that month.

Between the lines: "The U.S.-China trade dispute strikes a nerve with investors who worry about the new era of de-globalization and the use of national security to achieve economic objectives," Elina Ribakova, deputy chief economist at IIF, tells Axios.

  • "The key issue and focus continues to be the trade war, and earlier concerns that Chinese authorities would let their currency weaken."

Yes, but: Investors have shunned EM stocks, but have been buying bonds from the asset class at a high level. Emerging market debt has seen major inflows this year, with $23.1 billion in July.

  • EM's high yields continue to draw interest and investment, as U.S. Treasury yields have hit a 3-year low and European and Japanese government bonds sink further into record negative territory.
4. Oil prices nosedive after Trump's tariff tweets
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Data:; Chart: Axios Visuals

Crude oil also was hit hard by the tariff news, with oil prices suffering their worst trading day in 4 years, falling by 8%.

  • WTI crude prices fell below $55 a barrel and Brent dipped to $61.

Energy stocks fell across the board with the SPDR energy ETF dropping more than 2% on the day as the trade war escalation and fear of higher tariffs stoked worries about slowing demand in China and around the globe.

Between the lines: The tariff announcement could not have come at a worse time for the oil market, which was already primed for losses after the Fed's rate cut decision Wednesday. A weak dollar strengthens oil prices, which are measured in dollars.

  • The market also is preparing for a major supply surplus in 2020, which is the result of tepid demand growth at a time of surging supply.

P.S. ... Soybeans, the leading U.S. agricultural export to China, fell 2% to $8.47 a bushel on the tariff news. Corn and cotton futures also fell by similar amounts.

5. U.S. tourism is on the ropes
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Data: U.S. Travel Association; Chart: Axios Visuals

International visitors are cutting back on trips to the U.S. and spending less money in the country when they do come, data shows, as the strength of the dollar has risen, making U.S. goods purchases more expensive.

  • Worsening matters, the U.S.-China trade war has reduced appetite for American goods and experiences, further weakening international tourism revenue.

What it means: Data from the U.S. Travel Association (USTA) shows a steep and steady decline in the U.S. share of international travel, which is set to continue until at least 2022.

  • Other factors contributing to the decline of international tourism and spending include ongoing trade tensions, which materially dampen the demand for travel, and stiff competition from rival countries, USTA says.

The big picture: The U.S. share of the global travel market has been falling for 4 straight years since touching a high of 13.7% in 2015. The nation's share of international tourism earnings fell to 11.7% in 2018.

Why it matters: That decline in market share represents losses to the U.S. economy of 14 million international visitors, $59 billion in international traveler spending, and 120,000 U.S. jobs, USTA's data shows.

  • "Everyone is wondering how much longer the U.S. economic expansion can go on, and shoring up our international travel market share would be a great way to help it continue," said Tori Barnes, USTA's executive vice president of public affairs and policy, in a statement.

What's next? If the environment continues as expected through 2022, it would mean a further loss of 41 million visitors, $180 billion in exports and 266,000 jobs, USTA says.