It’s the running of the bulls! No, not the one in Pamplona in July. This stampede happened on Wall Street this week as jitters took hold and not for the reason one might have expected. Despite the importance of monetary policy to today’s markets, the first Federal Reserve policy decision and new Chair Jerome Powell’s Q&A session was a relative snoozer. The well-telegraphed intention to raise interest rates again was accepted with little reaction. Yields on the two year US Treasury bond had risen in recent days indicating the market’s acceptance of the decision as fait accompli. Even the formal revision to policy guidance (the “dot plots”) indicating two more hikes this year (total of three) followed by three next year did not raise much ire. We found Powell’s comments downplaying the Fed’s ability to forecast most interesting. Strategies like the “dot plot” and the Q&A session were intended to use the Fed’s power of communication as firepower when the rate cut bullets were spent at the zero bound. The perception of power and economic control by central bankers worked wonders in supporting confidence when times looked more bleak. It seems that they seek to shed this perception by stating fact (they cannot see the future any better than anyone else) as the Fed “normalizes” and reloads their policy gun with traditional bullets.
No, the stampede of bullish sentiment out the exit door is related primarily to fear of a global trade war. Trump announced the inevitable intention of enacting tariffs on Chinese goods. As we noted in a write up a few weeks back, Trump was clearly on a path to the People’s Republic with trade policy. At this point there is nothing official, but discussions are under way of what goods are likely to come under fire. While the actual tariffs may be on good ranging from shoes to electronic devices, the real issue is intellectual property. Trade Representative Robert Lighthizer has been investigating alleged theft of US intellectual property by Chinese entities since last year. It is suspected that China uses foreign-ownership restrictions on the Mainland to force US companies to transfer knowledge to Chinese companies. In addition, it has been suggested that Chinese corporations are directed to make acquisitions of US companies that are considered to hold strategic knowledge sought by the government. Concerns on intellectual property security have been longstanding for decades, but there has not been much direct action on the matter for fear of retaliation.
We are now seeing the first signs of retaliation. On the recent US tariffs on steel and aluminum, the US just this week gave an exemption to the European Union making China again the primary target. China responded with a relatively modest tariff on US goods (25% on goods worth $3 billion). Economically speaking, so far the measures on both sides are not path-changing to either economy. The risk is an escalation which destabilizes the global economic recovery – or spills over into other arenas like Chinese ownership of US Treasury debt estimated at a little over $1 trillion (out of $20 trillion outstanding). Both sets of national leaders need to take the bull by the horn to develop a go-forward policy that directly addresses the intellectual property concerns rather than run down the road staying just out of reach.