May 10, 2019

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Situational awareness:

  • Nearly 70% of economists expect faster wage growth next year, according to a Wall Street Journal survey. (WSJ)
  • The U.S. goods trade deficit with China shrank to its smallest in 5 years in March, data shows. (Reuters)
  • Edgewell Personal Care, which owns Schick razors, is buying razor maker Harry's in a deal worth nearly $1.4 billion. (CNN)
  • A shortage of helium has pushed prices to new highs, and some in the medical industry, which uses the gas as a coolant in magnetic and nuclear experiments, are suggesting a ban on party balloons. (USA Today)

1 big thing: Rethinking the market in the trade war's next phase

Illustration: Aïda Amer/Axios

President Trump raised tariffs on $200 billion worth of Chinese goods Friday morning to 25%. The president also is expected to tax nearly all of China's imports as punishment for Beijing’s attempt to "renegotiate" a trade deal.

China's ministry of commerce said it "deeply regrets" the U.S. tariff hike and will retaliate, though it didn't say how.

Why it matters: Having long priced in a happy ending to the trade war, the market will need to reassess U.S. businesses and the state of the U.S. economy. Further, supply chains may need to be rethought and entire businesses may have to be re-evaluated.

  • UBS Global Wealth Management's CIO Mark Haefele announced the bank would reduce risk exposure, noting further escalation could lead to a 10–15% decline in U.S. equities and 15–20% fall in the Chinese market.
  • "Trade-exposed sectors could suffer the most, including technology, industrials, and energy," he said in a note.

Details: Lingling Wei and Bob Davis of the Wall Street Journal report that Beijing was emboldened by the perception that the U.S. was ready to compromise because of Trump's lobbying for rate cuts by the Federal Reserve, a sign the U.S. economy is weak and in need of stimulus.

What's next? The global economy is so complex and interdependent that the second-, third-, and fourth-order effects are effectively unforeseeable, Axios' Felix Salmon writes.

  • The first-order effects of Trump's tariff hikes will be felt by any U.S. companies importing goods from China, since they’re going to have to pay the tariffs.
  • Second-order effects would include things like U.S. companies passing increased costs on to U.S. consumers, as well as retaliatory tariffs from China on U.S. goods.
  • Third-order effects might include U.S. companies relocating operations to Vietnam and other Asian countries if they think these tariffs are going to be here to stay. But at this point we’re in the realm of speculation. 

The big picture: On the U.S. side, the big question will be whether Trump is serious about taxing all incoming goods from China or whether he will continue to give carve-outs for products like the iPhone, as he did when he first began announcing tariffs last year.

On the Chinese side, authorities will likely target U.S. industries with political importance. Ahead of the 2018 midterms it was Harley-Davidson motorcycles, whiskey, cranberries, soybeans and pork, which hit — among other places — the home states of Senate Majority Leader Mitch McConnell and then-House Speaker Paul Ryan.

  • Expect tariffs this round to be just as targeted, and for the Chinese government to start taking aim at U.S. businesses that operate in China with home bases in important swing states.

2. This isn't how tariffs normally work

Data: Deutsche Bank, courtesy of chief economist Torsten Slok; Chart: Axios Visuals

Trump has complained about the "unfair" trade duties imposed by other countries on the U.S., but with the tariffs added Friday morning the U.S. has higher tariff rates than almost every country in the world, according to calculations by Deutsche Bank chief economist Torsten Slok.

  • Typically, mature economies like the U.S., Japan and the eurozone impose fewer tariff barriers because their industries are more advanced. The World Trade Organization recognizes tariffs as primarily a tool used by smaller countries to protect nascent industries and allow them to grow without competition from outside companies in rich countries.

3. America's biggest trade war losers

Adapted from Deutsche Bank; Chart: Axios Visuals 

As a major exporter of soybeans, one of the U.S. exports long targeted by China, Louisiana will be especially hard hit by the trade war.

  • Chinese tariffs also targeted petrochemical-heavy industries like plastics products in the second and third rounds of retaliation as the U.S. chemical industry began the first wave of more than $200 billion in new and planned infrastructure, S&P Global Platts notes.

What they're saying: "The potential of a 25% tariff from tonight would have a major impact on our production, on our investment and pricing," said Alex Camara, CEO of Audio Control in Seattle, on a call Thursday with reporters organized by the National Retail Federation.

  • "It frustrates me a little when I see headlines that tariffs are a tax on the Chinese economy. No, they are not. They are a direct impact on the cost and cash I have to spend on employment and investment. This is a direct tax."

4. Uber: By far the most money-losing IPO ever

Reproduced from Renaissance Capital; Table: Axios Visuals

Sentiment for Uber's initial public offering has fallen precipitously since the company announced it would go public.

After initially setting sights on a $120 billion valuation, the company said it raised $8.1 billion after pricing shares near the bottom an already marked-down range. The price gives the San Francisco-based company a non-diluted market value of $75.5 billion.

What happened: Part of Uber's fall from grace has been Lyft's poor performance as a public company and the stock market's dreary week, but Uber also is fighting newly woke investors worried about its penchant for losing money.

  • A survey of 50 hedge funds by investment adviser Titan found that 70% of respondents were not positive on the IPO, including 46% who were bearish.
  • The "market will need to see signs of improvement in unit economics and a path to breakeven to justify the current valuation," one respondent said.

Yes, but: Uber's IPO is still set to be among the 10 largest U.S. listings ever, and the biggest since Alibaba's $25 billion offering in 2014. The ride-hailing company sold 180 million shares for $45 each, coming in at the low end of the $44 to $50 marketing range.

5. The Treasury yield curve inverts again

The 10-year/3-month Treasury yield curve inverted again on Thursday, but investors may have missed it because it lasted for only minutes. It's the second time this year the yield curve has inverted, which is an accurate recession indicator cited by the Fed.

Investors and market analysts have largely written off the inversion as the product of central bank manipulation or a market aberration, and the S&P 500 had rallied 3% since the curve inverted on March 22 to the end of last week, before Trump's Sunday night tariff tweets erased almost all of those gains.

Driving the news: The yield curve has been compressing all week as prospects for a trade agreement between the U.S. and China have diminished.

  • Economists note that the ominous yield curve inversions that have historically accompanied recessions typically last longer than a matter of minutes or days. The curve was inverted in March for only about a week.

History: Ahead of the financial crisis the yield curve inverted in late 2005, 2006 and again in 2007 before the stock market collapsed in 2008.

6. U.S. may accuse Vietnam of manipulating its dong

Having already multiple times concluded that China is not manipulating its yuan currency, the Trump administration will expand the number of countries it scrutinizes for currency manipulation in an upcoming report, Bloomberg reported Thursday.

What's happening: "Vietnam may be named a manipulator outright for artificially holding down the value of the dong," sources told Bloomberg's Saleha Mohsin and Jenny Leonard, "after meeting all three criteria the Treasury Department uses to test for currency interventions. Internal debate is continuing over the issue and the administration has asked Vietnam to disclose more information before it releases the report."

Background: "President Donald Trump has in the past tweeted that China, Russia and the European Union all manipulate their their currencies to gain an unfair trade advantage over the U.S. He vowed on the campaign trail to label China a currency manipulator on his first day in office. But Treasury Secretary Steven Mnuchin has yet to do so because he has said Beijing doesn’t meet criteria set by Congress."

Of note: The U.S. has not labeled a major trade partner a currency manipulator since 1994.