Macro Views

Pyrford Perspectives: tariff tensions and rate reductions

Tariff tensions increased in August, while President Donald Trump lambasted the Federal Reserve with some extraordinary comments.
September 2019

Risk warnings

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The trade war between the US and China is an ever-evolving tale. In the latest chapter, US-imposed China tariffs are set to increase to 30% (from 25%) on approximately $250 billion of goods from 1 October, while tariffs on $300 billion of goods have been taxed at 15% (up from 10%) in two tranches – the first was on 1 September, with the second coming on 15 December…or not.

To say the situation is fluid is an understatement – every time Trump comments on the matter, the goalposts seem to shift. China has retaliated, although those details also remain ‘fluid’, and Trump has bounced back by “demanding” that US businesses move operations out of China. You couldn’t make this stuff up.

Tariffs, as we have repeatedly remarked, are very bad business. They hinder economic growth everywhere. Many US businesses are already feeling the pinch from higher import prices and curtailed supply chains, while the great Chinese export machine is stuttering. The slowdown in China is directly hitting other front-line exporters such as Germany and Japan.

Risk warnings

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

Mr Trump, never one to waste a day without some extraordinary tweets, said: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi.” To the uninitiated, Mr Powell is Chairman of the US Federal Reserve, whilst Chairman Xi is, of course, China’s supremo. President Trump believes the Fed should have reduced interest rates by at least a full percentage point at the end of July when it opted for “only” 25 basis points. We emphatically disagree – particularly since the Fed has stopped the gradual shrinkage of its enormously bloated balance sheet. Quantitative easing is once again a reality, with quantitative tightening well and truly buried.

Central banks in other countries that have also recently reduced their key interest rate include: New Zealand, Australia, Russia, Chile, South Korea, Brazil, South Africa, Mexico, Saudi Arabia, India and Turkey. It is expected that the European Central Bank will cut its deposit rate this month – probably to a negative 0.5%. Robust world in which we are living, isn’t it!

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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