* Trade War Paranoia is more bark than bite.

* German exports declined -3.2% M/M in February.

* Tech led S&P 500 lower last week.


With “Trade War” fears hitting an apex last week, we thought it important to recap the tariffs that have actually been put in place:

January 2018 – The United States puts a 30% tariff on solar panels and a 20% tariff on large residential washing machines (which increases to 50% in year two).  The tariff on solar panels declines over time from 30% in year one, 25% year two, 20% in year three, and ends at 15% in its fourth year.  Note that the 2.5 gigawatts of imported solar cells are exempt from the tariff each year.  As for the washing machines, the U.S. recently struck a trade deal with South Korea (note that LG and Samsung are the big washing machine importers and are based in South Korea) and it remains to be seen if South Korea will be exempt from these import taxes.   But even if they are not, Samsung just opened a washing machine factory in Newberry, SC, and LG is opening a manufacturing plant later this year in Clarksville, TN.   – Net economic impact of these solar and washing machine tariffs is therefore close to zero.   All bluster, no bite.

March 2018 – The United States puts a 25% tariff on steel imports and a 10% tariff on aluminum, but exempts many imports from its neighbors and allies, as well as, allows the commerce department to allow for product-level exemptions.  – We are waiting to learn the extent of the product-level exemptions, but as it stands, the steel and aluminum tariffs will be highly targeted in scope.  Given all the exemptions, it’s unlikely that total tariffs will exceed $9 billion (U.S. imports about $42 billion in Steel and Aluminum each year but a good portion of that will be exempt from tariffs.  Even if NONE of it were exempt, we are talking about a total tariff of $9 billion.  Net of all the expected exemptions, we expect tariffs to have a de minimis impact on the U.S. economy (probably less than $5 billion in total tariff).

April 2018 – China imposes a 15% tariff on 120 U.S. products including: fruits, nuts, wine, and steel pipes.  Also, they impose a 25% tariff on 8 other products including recycled aluminum and pork.  The estimated value of these goods imported into China is roughly $3 billion.

There has been a lot of back-and-forth between President Trump and China regarding additional tariffs, but none have been put in effect.  In fact, China announced retaliatory tariffs on $50 billion of U.S. goods on April 4th but stated that the tariffs won’t actually take effect unless the U.S. puts more tariffs in effect.  Bottom line … no new tariffs have been put in effect by either side.   This is all simply bluster ahead of future trade negotiations.   And with North Korea now willing to sit down to talk about denuclearization of the Korean Peninsula, Trump has a feather in his cap and can already claim victory.   We think the trade spat hit an apex last week. 


In the month of February, the German foreign trade balance declined -€2.3 billion to +€19.2 billion (seasonally adjusted), according to Destatis.  In the month, Exports fell -3.2% M/M to €107.5 billion, whereas imports fell -1.3% M/M to €88.3 billion.  However, on an unadjusted basis, Germany’s trade surplus increased +€1.1 billion to +€18.4 billion.  On a Y/Y basis, exports slowed to +2.3% Y/Y (versus +8.6% prior) and imports slowed to +4.7% Y/Y (+46.9% Y/Y prior).  Note that the EUR/USD exchange declined for the first time in four months, down -1.8% M/M at the end of February.




U.S. GDP:  Our GDP model points toward stronger growth in the quarters ahead (+3% Real GDP growth through Q4 2018) and our model doesn’t even factor in potential stimulus from tax reform or other policy proposals.  We are still highly optimistic on stimulative economic effects for 2018 due to tax reform and we are encouraged by the recent drop in interest rates.   As such, we still believe a good base case estimate for 2018 Real GDP is for +3% growth.

U.S. Inflation:  U.S. inflation is still in a slight upward trend, but CPI has leveled off since September.  We continue to believe that wage inflation should turn higher as labor slack (particularly in prime working age groups) continues to decline.    Note that the Fed’s preferred inflation metric, the Core PCE Deflator, increased to the Fed’s 2% inflation target in January (when viewed as a 3 month annualized rate of change).

U.S. Federal Reserve:  Although everyone seems to believe that the FOMC will hike rates 3-4 times in 2018, we believe they will become increasingly more data-dependent for the rest of the year.  We believe it is now necessary for inflation and economic growth to accelerate in order for the Fed to remain hawkish.  For now, we still believe two additional rate hikes will happen in 2018.

U.S. Treasuries:  With inflationary pressures slowly building, and Real GDP improving to +3.0%, we believe 10-year U.S. Treasury Yields will continue to trend higher and will likely exceed 3% by year end 2018.

U.S. Equities and Earnings:  S&P 500 operating earnings will rise materially yet again in 2018 and 2019, but the question remains, will the market put a 20 P/E multiple on forward earnings?  We think a 20 forward multiple is aggressive, but a 19 P/E may not be.   Our new SPX target is for a 19x P/E on 2019 forward earnings of $160, bringing our 2018 SPX target to 3,000).  We continue to favor the homebuilders, given the demographic tailwind and lack of inventory.   We also prefer financials given expectations for economic growth.

Argentina:  Argentina’s economic data continued to improve in February:  Industrial Production was up 5.3% Y/Y, Construction was up +16.6% Y/Y, and Exports were up +10.1% Y/Y.   Argentina finished 2017 on a strong note as GDP accelerated to +3.9% Y/Y in Q4, the Unemployment Rate fell to 7.2% in Q4, and Retail Sales were up +20.2% Y/Y in December (and increased further to +21.2% in January).  However, inflation remains a problem at +26% Y/Y (far better than 45% from a year ago though), and Consumer Confidence has turned lower (43.8 in March).

Brazil:  The macro data in Brazil continue to improve.  GDP continues to improve (+2.1% Y/Y in Q4), PMI’s have turn notably higher in 2018, Industrial Production is up +2.8% Y/Y, Retail Sales are up +3.2% Y/Y, tax receipts are growing, Exports are up +7.6% Y/Y, and inflation remains below trend (+2.9% Y/Y in January) – which allowed the central bank to cut rates once again.  However, Unemployment remains persistently high at 12.6%.   Of all the major global bond markets, Brazilian 10-year bond yields are the richest in the world at 9.77%.  As the economy improves, and inflation cools, we would expect to see investors reach for yield in Brazil.   As such, we remain bullish on Brazil 10-Year Sovereign Bonds.

Canada: Despite worries about Canada’s housing market, so far Canada’s economic data remain healthy.  Consumer Confidence remains at high levels, manufacturing PMI’s remain strong (March increased slightly to 55.7 from 55.6), unemployment has been sub-6% for five months in a row (5.8% in March), retail sales are elevated (+3.6% Y/Y in January), CPI has accelerated to +2.2% Y/Y in February, and Canada’s monthly GDP remains at a healthy 3.5% Y/Y.

Mexico: Mexico’s GDP has been in a slowing trend since Q1 2017 (+3.3% then, now +1.5% Y/Y) – and Mexico is now on our macro risk watch.  The Mexican Central Bank has been increasing interest rates since late 2015 (mainly because of fear of dollar weakness).   Consumer Confidence has been trending slightly downward since September.  However, PMI’s and New Orders remain in an up-trend, Exports are up +12.5% Y/Y, Industrial Production turned positive on a Y/Y basis, Retail Sales are now up +0.5% Y/Y, and unemployment is still low at 3.4%.

Venezuela: We will leave this as a placeholder in the event that Venezuela ever becomes an investible market again.  We are hopeful …


United Kingdom:  The U.K. economy has been reasonably resilient throughout the BREXIT process.   Unemployment remains steady, Retail Sales increased +1.1% Y/Y in February, Industrial Production increased +1.6% Y/Y in January, and PMI’s continue to indicate growth.  However, Consumer Confidence has remained negative, home prices have begun to turn lower in London, while inflation remains elevated.  In fact, the Bank of England raised rates due to higher inflation (CPI now at 3.0%), despite recent weakness in economic data.

European Union:  The stronger Euro may now be a problem for Mario Draghi as CPI has been in a slowing trend for several months.   Not to mention, Industrial Production slowed to +2.7% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs.   We think the idea of an ECB hike within the next year is basically out the window, and as such we remain bullish on the Euro STOXX 50 Index, as well as European Financials.

European Central Banks:  The ECB is slowly removing accommodation and will likely end its asset purchases by year end.  But Mario Draghi has given no indication about raising rates and the recent decline in CPI will give them even further pause for doing so.  We will watch to see if current ECB tapering has any meaningful impact on the economic outlook.

Eastern Europe: We continue to believe risks remain for Eastern Europe given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   Yet, economic data have been robust this year across most of Eastern Europe.

South Africa:  Now that Zuma’s out, Business Confidence appears to be on a slight up-swing, PMI’s have turned further positive in February, Exports increased +8.7% Y/Y in Q4, and Retail Sales were up +3.1% Y/Y in January.  But these subtle improvements are going to need to get significantly stronger to crush unemployment (26.7% in Q4).

Turkey:  The Lira is weakening again, along with Turkey’s economy (Manufacturing PMI fell nearly 4 points in March and Consumer Confidence is starting to weaken).  Let’s not forget that CPI is already +10.3% Y/Y.   Despite the chaotic political situation, the macro backdrop had been strong, as Real GDP was +7.3% Y/Y in Q4, Industrial Production accelerated to +12.9% Y/Y in January, Business Confidence had improved throughout Q1, and exports accelerated to +10.7% Y/Y in January.


Australia: We’ll get some big data out of Australia tonight with PMI’s, Home Prices and Job Advertisement trends that we’ll want to watch.   As backdrop, the RBA has cut rates twice in the past year and Australian data is mixed.  So far, PMIs indicate solid growth, Retail Sales increased +3.0% Y/Y in February, Auto Sales are up +6.7% Y/Y in December, and business and consumer confidence have been strong.    Conversely, the Unemployment Rate increased slightly to 5.6% in February and we are starting to see weakness in the housing market (private sales down -6.1% M/M and building approvals are up just +0.9% Y/Y).  We remain neutral on Australia at this time, on concerns about China exposure but so far China is still posting strong data.

China:   With China cracking down on shadow banking, pollution, industrial overcapacity, and removing migrant workers from its cities, we expect China GDP to continue to trend lower and we are monitoring the situation closely.   PMI’s continue to indicate growth, but are now in a clear slowing trend as backlogs and new orders weaken (see above), Industrial Profits slowed to +16% in February, and Durable Goods Orders fell 12% M/M in February.  Home Prices are up +5.4% Y/Y (half the rate of change from a year ago). CPI accelerated to +2.9% Y/Y in February and Industrial Production is up +7.2% Y/Y thus far in 2018.  We are watching for further signs of stress within China’s credit and housing markets.

India:  Indian economic activity appears to have recovered nicely since the new Goods and Services Tax (GST) was implemented as Industrial Production accelerated to +7.5% Y/Y in January, Commercial Credit accelerated to +11.5% Y/Y, and inflation appears to have turned lower (+4.4% Y/Y in February).  However, note that PMI’s indicated contraction in February and Exports slowed to +4.5% Y/Y in February.

Indonesia:  Indonesia’s GDP and Private Consumption Expenditures have been stable at 5% Y/Y, Consumer Confidence has been stable, PMI rebounded to 51.4 in February, Retail Sales rebounded +1.0% Y/Y in February, and Exports accelerated to +11.8% Y/Y in February.  However, Industrial Production declined -0.4% Y/Y in January and CPI ticked higher in March.  Our best guess is that the central bank’s dovish policy stance may revert to a more neutral stance going forward (they declined to cut rates again in December).

Japan:  Overall, we remain bullish on Japan given Japan’s economic activity remains in an improving trend: unemployment remains low (2.5% in February), Industrial Production is up +1.4% Y/Y, Retail Trade is up +1.6% Y/Y, and Bank lending is up +2.1% Y/Y.  Conversely, Exports are now down -2.1% Y/Y, whereas Imports accelerated to +11.7% Y/Y (thanks to higher oil prices).

Russia: The Russian economy isn’t setting the world afire, but GDP came in at 1.5% in 2017, despite Q4 being weaker than expected at +0.9% Y/Y, and March’s manufacturing PMI increased a hair to 50.6 (from 50.2).  Overall, economic data continue to suggest economic growth, as Retail Sales were up +4.0% Y/Y in February, Real Wages are up +6.2% Y/Y, the Unemployment rate improved to 5.0% in February, Industrial Production is up +1.5% Y/Y, and exports were up +31.3% Y/Y in January.  Meanwhile, Core CPI slowed to +1.9% Y/Y in February, which allowed the Bank of Russia to continue to cut rates.   However, it should be noted that Consumer Confidence remains negative.  Nonetheless, Russian equities remain among the cheapest in the industrialized world and we remain bullish.

South Korea:  We are keeping an eye on trade data into China, which improved in March.   Overall, SK is beginning to show signs of slowing post-Olympics (imports are slowing and the Nikkei South Korea PMI slipped below 50 in March).