Financial Review

Tariff This

…Steel and aluminum tariffs. Fed might gradually hike 4 times. Manufacturing jumps. Construction spending flat. Wells Fargo – they just can’t stop.

Financial Review by Sinclair Noe for 03-01-2018

DOW – 420 = 24,608
SPX – 36 = 2677
NAS – 92 = 7180
RUT – 5 = 1507
10 Y – .06 = 2.80%
OIL – .33 = 61.31
GOLD – .80 = 1318.00


February might have been the cruelest month, but March is off to a nasty start.


Trump said the US will slap tariffs of 25 percent on steel and 10 percent on aluminum and expects to sign a formal order next week. He has said tariffs are needed to ensure fair trade for the US, with the Commerce Department arguing they’re necessary to protect the nation’s security. The S&P 500 Index slumped to session lows, US stocks for companies that consume the metals like Ford Motor and General Motors fell, while shares of US steel and aluminum producers jumped. Treasuries climbed as investors reacted to the news, even though tariffs might be considered inflationary. Canada, the biggest foreign supplier of steel to the US, said the measures are unacceptable while the European Union vowed to “react firmly” with World Trade Organization-compliant counter-measures in the next few days.
Trump’s statement followed hours of confusion. Staffers in the White House tried to explain what was happening – there would be an announcement, then it was postponed, the legal review of the trade measure was not yet complete and then the tariff event was re-billed as a “listening session” with chief executives, including ArcelorMittal USA’s John Brett, Nucor’s John Ferriola and Century Aluminum’s Mike Bless. At that meeting, which was opened up to the press, Trump announced the tariffs.


Details are still short, and the deal has not been actually signed. The trade action stems from a Commerce Department investigation that concluded imported metal threatens national security by degrading the American industrial base. Advisers have been bitterly divided over how to proceed on the tariffs, including whether to impose them broadly on all steel and aluminum imports, which would ensnare allies like the European Union and Canada, or whether to tailor them more narrowly to target specific countries.  GOP Senator Ben Sasse called tariffs “a massive tax increase on American families.” There’s a strong contingent of anti-tariff figures inside the administration, including economic adviser Gary Cohn, Defense Secretary James Mattis, and Secretary of State Rex Tillerson, and National-Security Adviser H.R. McMaster. But Commerce Secretary Wilbur Ross, trade adviser Peter Navarro, and Trade Representative Robert Lighthizer are pro-tariff. NBC News is reporting H.R. McMasters will leave the White House in the next few weeks – although this is not necessarily because of his position on tariffs. This follows the resignation of Communications Director Hope Hicks yesterday.


Still unclear is whether tariffs will help or hurt. While American steelmakers lost three-quarters of their jobs between 1962 and 2005, a major study by the American Economic Association showed that much of this had been due to improved production technology as output per worker rose fivefold.


So, even if trade protection leads to increased domestic production, increases in employment may be far less than many hope. Meanwhile, consumers of steel and aluminum have lobbied hard against the tariffs, with estimates that 2 million jobs were in industries that use steel “intensively”, including auto parts, household appliances, farm machinery and oil equipment. Across many states, the number of jobs adversely affected in these steel-using industries could far exceed any steel jobs saved. Jobs in the consuming industries are concentrated in California, Texas, the north-eastern and midwestern states that comprise the rust belt and states in the south-east. That was reflected in the market today. AK Steel was up 2.8%, US Steel was up 2.3% and Nucor rose 1%. By contrast, industrial stocks such as Boeing fell 3.5%, Ford down 3%, Caterpillar down 2.8%. Where this all goes, only time will tell. Maybe it leads to a revitalization of steel and aluminum industries in the US, or maybe it is Smoot-Hawley revisited, setting us on a path to trade wars.


And we can’t put the blame tariffs for the drop in stocks, at least not totally. Traders were looking for an excuse to sell. The Dow Industrials and the S&P 500 broke through the 50-day moving average yesterday. The 50 day moving average was support yesterday, and today it became resistance – stocks moved up near the average then tumbled lower. The Nasdaq broke the 50-day on an intraday basis and closed just above. Markets had rallied from the sharp sell-off in early February. For a while it looked like a V recovery – now it looks like we might re-test the lows of Feb. 9th – which would be a more typical response. Stocks turned negative for 2018.


“Gradual” has been the Fed’s favored word to describe the current tightening cycle, and it’s thought to be code for three rate hikes in 2018. Enter Federal Reserve Bank of New York President Bill Dudley. Taking questions following a speech in Brazil, he says four hikes this year would also fit into the “gradual” description. Dudley is retiring from the Fed this year, so there’s that.


Jerome Powell gave his first congressional testimony as Fed chairman this week. On Tuesday he told members of the House Financial Services Committee his outlook for the economy had strengthened since December, causing investors to increase slightly the odds they see for a fourth interest-rate increase this year. In their most recent set of projections, Fed officials in December penciled in three hikes in 2018. They meet again later this month. Today, Powell testified before the Senate Banking Committee and he reiterated the central bank will continue to raise rates gradually to keep unemployment and inflation in balance. Powell said: “There’s no evidence the economy is currently overheating.”


Powell largely sidestepped jumping into debates about fiscal policy but he did come down against tariffs – this was just before Trump’s tariff announcement – Powell said, “the tariff approach is not the best approach, the best approach is to deal directly with the people who are directly affected, rather than falling back on tariffs,” Powell said. “But again, these are not issues that are consigned to us, they’re really for you and for the administration.” Powell said a system where goods and services flow freely is a net positive for many countries, though the benefits aren’t spread equally. New York Fed President William Dudley was even more explicit in his criticism of trade barriers, saying, “protectionism is not the answer.” “Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries,” Dudley said. “Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world.”


The Institute of Supply Management’s manufacturing index jumped to 60.8 in February, up from the 59.1 reading recorded the month before. A reading above 50 for the index indicates expansion in the manufacturing sector, and a reading below 50 signals contraction. This measure is the highest level of growth since May 2004.


Construction spending was unexpectedly flat in January as a surge in investment in public construction projects was offset by a decline in private outlays. Outlays on public construction projects increased 1.8 percent in January to the highest level since August 2015, after rising by the same margin in December. Spending on federal government construction projects vaulted 14.9 percent to the highest level since September 2011. The Commerce Department said the virtually unchanged reading in construction spending followed an upwardly revised 0.8 percent jump in December. Construction spending increased 3.2 percent on a year-on-year basis.


Wells Fargo’s legal and regulatory struggles expanded to previously untarnished businesses as the company revealed new allegations of improper sales practices. The Federal Reserve vowed to keep sanctions in place for a “significant period.” Wells Fargo said government agencies had inquired about improprieties in the wealth-management business related to 401(k) rollovers and other products. In regulatory filings, the lender revealed it is also responding to queries from government agencies into its foreign-exchange business. The company is conducting a separate review of “incorrect fees” charged to customers’ fiduciary and custody accounts. Wells Fargo said the review is in its “preliminary stages” and centered around non-publicly traded assets. The bank has said it’s facing at least three major probes, including one by the Department of Justice. Adding to the list of probes and reviews are allegations by a former Wells Fargo financial-crimes investigator who said in a complaint filed Wednesday that the bank improperly follows up on allegations of fraud in customer accounts. Last month, the Fed put in place sanctions preventing the bank from getting any bigger until it fixes its problems; and today, Fed chair Powell said those sanctions will not be lightly lifted.


If you were breathing a sigh of relief that you weren’t among the 145.5 million people whose identities were stolen last year in the Equifax hack, you might want to find a fresh four-leaf clover. Equifax said it will notify an additional 2.4 million US consumers that they were affected by the hack. The consumers will be notified and the firm will offer them free credit-monitoring and identity-protection services.


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