The Gross National Product (GDP) of the USA is about $20 trillion. So far retaliatory tariffs from China are about 25% on $50 billion in goods and 10% on $200 billion in goods. That equates to about $32.5 billion – which is a whopping 0.16% of $20 trillion – infinitesimally small really, if you think about it. The Treasury is going to issue about that much in 7-year notes today.
Most people agree the US does not get a fair shake on trade. And look at our markets, aside from a few blips US markets are rolling along. Chinese stock markets not so much. The US economy is growing nicely. Fed Chair Powell said current fiscal policy is helping the economy. Sure there are a few weak links like wage growth and existing home sales. This goldilocks environment will not go on forever – there will be another bear market and recession at some point – but it does not appear imminent at the moment
The Fed is the big concern right now. Yesterday’s rate hike came with the removal of the word “accommodative.” As our friend and 2019 Almanac dedicatee Art Cashin, UBS Director of Floor Operations, said on CNBC yesterday, “I think by removing the word ‘accommodative,’ he pretty much said we might be at the spot where rates belong right now.”
But the 10-year and 30-year bond rates dipped yesterday more in response to the Fed’s lowered economic growth forecasts, which implies that they think current GDP growth rates rate can’t last. The Fed is forecasting 2.5% for next year, 2.0% for 2020 and keeping its long-run forecast for 2021 and beyond at 1.8% vs. 3.1% for this year. This is putting us at risk of an inverted curve as the Fed Drives the short-end higher.
Fed Chairman Powell was asked Wednesday at his press conference about his Kansas City Fed Jackson Hole symposium comments this summer on “longer-term structural challenges for the economy” and “the federal budget deficit which has long been on an unsustainable path.”
Powell responded, “We don’t have a responsibility for fiscal policy, but in the longer run fiscal policy will have a significant effect on the economy.” He added, “With our uniquely expensive healthcare delivery system and our aging population we have been on an unsustainable fiscal path for a long time…. In the end, we will have to face that and the sooner the better. Also these are good times. This is the economy at nearly full employment. Interest rates are low — it’s a good time to be addressing these things. I just put that out there and leave it at that.”
However, this is not likely to come home to roost just yet as we are about to enter the Midterm Year Q4 Sweet Spot Launching Pad.
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