The US tariff war with China is heating up and it will impact global markets.
February 4 (King World News) – Peter Boockvar: It seems that the tariff strategy is falling into three buckets. One, what we’ve seen over the past few days where they are used as a cudgel in order to achieve a non-economic end, such as stopping fentanyl and migrants and which was successful in its aims with Mexico and Canada. China on the other hand is a different animal and at least for now we’re back in a tariff battle with them as they retaliated, though seemingly measured, with a variety of measures including blacklisting PVH products from the country, Illumina too, 17% of the world’s population PVH might not longer sell to.
Also, limits were placed on the export of key raw materials that we need. Secondly, use tariffs to protect some domestic industries, like steel and aluminum that we saw in 2018 and also encourage manufacturers to bring production back to the US. Thirdly, use tariffs to raise money as part of the Trump income tax extension deal needed this year.
As for US Main Street businesses that are caught in the middle of all of this, I have to believe many are on edge, visibility is limited and we’ll see what that means for hiring and capital investments. On the other hand, we anticipate major relief on the regulatory side and that will be the balancing act they are going to have to dance around.
The Hang Seng by the way rallied by 2.8% overnight as the 10% tariff on them is manageable in their eyes and in response to the more mild response back against us. The Hang Seng does house some cheap stocks that we own and whose businesses will benefit from growth throughout Asia, not just in China. The offshore yuan is up for a 2nd day on the same hopes that maybe the tariff back and forth between us and them can be smaller than last time.
While maybe tariffs are not inflationary past the one time price set, the 2 yr inflation breakeven doesn’t care as yesterday it closed at 2.98%, the highest since March 2023.
The 5 yr did as well at 2.60%.
Take note too that Japanese JGB yields continue higher. The 10 yr yield rose almost 3 bps to 1.28% which is the highest since April 2011.
The 2 yr yield at .75% was last seen in October 2008.
US auto sales in January totaled 15.6mm at a SAAR, below the estimate of 16mm. That compares with 15mm in January 2024 and 16.6mm in 2019. WardsAuto said “There did not appear to be an end-of-month boost in demand, either as a rebound from the mid-month weather related losses or pull-ahead volume in case of still possible future tariff-related price increases. However, January’s gain marked the fourth straight y/o/y increase in volume and fifth consecutive for the seasonally adjusted annual rate.”
I’ll add and say again, that auto sales are still trending below 2019 levels results in less than needed used car supply.
We know the largest swing factor in the CPI calculation are rents and we get to hear from companies directly in this earnings season rather than just relying on Fed surveys, Zillow and Apartment List to get our rental information. Equity Residential who has many properties on the coasts (Boston, NY, DC, Seattle, SF and Southern California) said its Q4 2024 blended rental rate was 1%, well below what CPI is telling us and means that services inflation should continue to decelerate this year. Seasonality is a factor though as it always slows in Q4 and they expect Q1’s blended rate “to be between 1.4% and 2.2%.”
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