Last week was all about the rising trade tensions between the US and China which resulted in ten year UST notes 5bp lower in yield and the S&P 500 index nearly 3% lower on the week.
The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.
In the Fed’s latest semi-annual Financial Stability Report, it has again warned that companies with already large amounts of debt are continuing to borrow at a breakneck pace, prompting fears that if the trend continues there could be a risk to the financial system.
The former Fed chair, Janet Yellen, is also on record warning that if the economy was to take a downturn, things could go south for those highly indebted companies very quickly. In February she told an industry group ‘I have expressed concerns about leveraged lending, I do think non-financial corporations have run up, really, quite a lot of debt’ adding ‘What I would worry about is if the economy encounters a downturn, we could see a good deal of corporate distress. If corporations are in distress, they fire workers and cut back on investment spending. And I think that’s something that could make the next recession a deeper recession’.
This week we see a continuation of the trade talk adding to volatility in markets along with numerous inflation indicators across Europe as well as German GDP and EU employment statistics. In the US Retail Sales and Housing take centre stage although the Empire manufacturing series is also of interest.