March 2nd, 2018
Wall Street incurred another selloff this week, this time triggered by Trump announcing he would place a 25% tariff on steel and 10% on aluminum imports. The details are to follow as early as next week. The announcement overshadowed a strong U.S. manufacturing report and a modest inflation report which should keep the Federal Reserve on its gradual rate hike path. For the week, the Dow Jones Industrial Average shed -3.05%.
Manufacturing Strong as Tariffs Announced
U.S. manufacturers have enjoyed a solid rebound over the past twelve months, driven by high global demand. The Institute for Supply Management Manufacturing Index showed demand for U.S. manufactured goods remained strong in February, rising to 60.8 from 59.1 in January. Numbers above 50 indicate expansion in the manufacturing sector while numbers below 50 indicate contraction. February’s reading marked the highest level since May 2004. Gains were strongest in the employment component of the index, up 5.5 points to 59.7. New export orders were also robust, up 3 points to 62.8.
The strong gains in the manufacturing report were quickly overshadowed, however, by the White House’s announcement it would place tariffs on steel and aluminum. Setting the steel and aluminum makers aside, who stand to benefit from higher prices and less competition, manufacturers more generally were quick to oppose the administration’s move, contending that higher tariffs could lead to job losses and weaken U.S. competitiveness. Steel and aluminum are major inputs in auto manufacturing, oil and gas, and construction as well as in the production of everything from beer cans to golf clubs. They also contend the touted benefits from protectionist policies are misleading since, according to the National Tooling and Machining Association and Precision Metalforming Association, 6.5 million people are employed by businesses utilizing steel compared to just 80,000 working in steel production. The tariffs would mean that U.S. finished good costs could rise, while the supply of cheaper metal currently imported to the US will be diverted to the benefit of foreign manufacturers.
Fed’s Preferred Inflation Report Calms Fears
The conversation this week shifted quickly from interest rates to tariffs. While tariffs had been a prominent campaign topic for Trump, the lack of preliminary activity on the matter and the timing seemed to catch the market off guard. The White House’s position seems based on the idea that higher prices won’t have a material impact to the broader economy, while the imposition of tariffs will help level the playing field for key domestic industries who are unfairly facing state-supported competitors. Furthermore, Trump is betting that other countries will have more to lose than the US, given our enormous trade imbalance. As a result, he seems to think the retaliatory response from them will be muted. In truth, it is hard to know what the actual impact from tariffs might be at this stage, except to know that the relative calm has been disturbed. Markets loath uncertainty, but while the tariff announcement managed to initially pull the rug out on investors, nerves seemed more soothed by Friday’s close.
The Week Ahead
Happy Birthday, Texas!
On March 2, 1836, the Texas Declaration of Independence was adopted by the Convention of 1836 at Washington-on-the-Brazos during the Texas Revolution. A group of 59 delegates elected from each municipality in Texas convened in the town uncannily named Washington, TX next to the Brazos River 100 miles east of Austin. The group created and signed the Texas Declaration of Independence which proclaimed Texas a republic independent from Mexico. The delegates chose David Burnet as their interim leader and confirmed Sam Houston as the commander-in-chief of all Texan forces for the temporary government. The ad interim government ended with the inauguration of Sam Houston as president on October 22, 1836.
Happy Birthday, Texas!