AIIS Market Update-June 2018

SEATTLE (Scrap Monster): After President Trump announced on June 1 that Canada, Mexico and the European Union will be subject to the new 25 percent tariffs on steel and 10 percent tariffs on aluminum from which they had been temporarily exempted, those trading partners quickly indicated that they would implement retaliatory measures.

The European Union said it will impose duties on about $3.4 billion of American products starting in July as a “measured and proportionate response to the unilateral and illegal decision taken by the United States.” Mexico announced tariffs on $3 billion of imports from the United States, while Canada is targeting a list of American products valued at $16.6 billion that, the Canadian-American Business Council observed, “was clearly drawn strategically to exert maximum pain politically for the president.”

“The idea is, you look at a map of the congressional districts of the United States, you look at which members of Congress are in leadership positions and then you look at the big industries in those districts and then you draw up your list accordingly,” Council CEO Maryscott Greenwood said. “And this list was clearly drawn up with this in mind.”

Similarly, Canada, Japan, Germany, France, Great Britain and Italy have, according to The Wall Street Journal, “agreed to pursue a more coordinated response to create ‘a firewall’ against any further U.S. tariffs moves, which could include targeting of more products from states with key U.S. lawmakers.”

Tensions between the allies only worsened after they met face-to-face at the G7 Summit in early June, with Trump refusing to sign on to the group’s joint communique and lashing out at Canadian Prime Minister Justin Trudeau on Twitter as “very dishonest and weak” after Trudeau described the U.S. tariffs as “insulting” and said Canadians “will not be pushed around.”

Economists and business interests, meanwhile, continue to warn against protectionism, with the U.S. Chamber of Commerce cautioning that “launching a tit-for-tat trade war would harm the U.S. economy and undermine American leadership.”

“Such a move would hit American manufacturers with higher costs, slow the growth of the U.S. construction sector, and put the brakes on job creation in both of these key industries,” Chamber Executive Vice President Myron Brilliant said. “U.S. steel prices are already nearly 50 percent higher than those in Europe or China, and aluminum prices have been extremely volatile; this move would add substantially to these challenges.”

In a June 5 report, The Trade Partnership concluded that for every job gained in the steel and aluminum industries as a result of the tariffs, more than 16 will be eliminated throughout the rest of the economy, resulting in more than 400,000 net jobs lost. The report estimated that the U.S. economy will lose nearly $37 billion annually, a 0.2 percent reduction in gross domestic product.

While the administration has justified the tariffs on national security grounds – at least partly in an attempt to prevent the World Trade Organization from ruling against them – the Trade Partnership report ended with the assertion that “tariffs that destabilize the U.S. and global economies are a detriment to national security.”

The economic gamble by the president comes at a time when the economy appears to be at its strongest point since before the Great Recession. With 223,000 jobs being added in May, the unemployment rate stands at 3.8 percent, the lowest it has been since April 2000. And the rate has not been below 3.8 percent since 1969.

Economic growth in the first quarter was revised slightly downward to 2.2 percent from the 2.3 percent that the Bureau of Economic Analysis had estimated a month earlier.

The Institute for Supply Management’s Purchasing Managers Index increased 1.4 points to 58.7 in May, and the Institute noted that, “Comments from the [survey] panel reflect continued expanding business strength.” It also quoted several panel members as expressing concerns about price hikes in the supply chain, including one who said, “Continued talk around steel tariffs has resulted in price increases for domestic line pipe, while [hot-rolled coil] seems to be moving sideways. Temporary exemptions for allies and an agreement with South Korea have not calmed the market.”

The Conference Board’s Consumer Confidence Index increased 2.4 points in May to 128, with the board’s director of economic indicators saying, “Confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”

The University of Michigan’s Index of Consumer Sentiment slid less than a point to 98 in May. The survey’s chief economist observed that, “Consumers have remained focused on expected gains in jobs and incomes as well as anticipated increases in interest rates and inflation during the year ahead.”

Given the solid economic numbers and accompanying confidence – and with the full impact of tax reform still to be felt – the Federal Reserve is expected to raise interest rates for the second time this year at its June 12-13 meeting. Going into the meeting, the target range for the federal funds rate was 1.5 to 1.75 percent.

Housing starts in April were 10.5 percent higher than they were in April 2017, despite a 3.7 percent dip from March, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, meanwhile, fell 2.5 percent from March to April because of “the utter lack of available listings on the market to meet the strong demand for buying a home,” according to the National Association of Realtors. The median price for an existing home in April was $257,900, which was 5.3 percent higher than a year before.

Light-duty truck sales in March were 16.3 percent higher than they were in March 2017, while car sales were 9.2 percent lower. Year-to-date, truck sales increased 9.8 percent compared to last year, while car sales decreased 10.8 percent.

The Dow Jones Industrial Average ended May at 24,415.84, more than 250 points above its April 30 close. The S&P 500 Index gained more than 57 points during the month to reach 2,705.27.

The dollar continued to maintain its strength and, on May 31, was trading at 0.86 euros, 0.75 pounds, 108.74 yen and 6.41 yuan.

President Reagan – whom Republicans once revered – warned in 1988 of the dangers of protectionism: “Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends – weakening our economy, our national security, and the entire free world – all while cynically waving the American flag.” Clearly, some entertainers turned politicians had a better grasp of policy than others.

Courtesy: AIIS