April 11 – The tariff bidding war ratcheted higher with China overnight, but Wall Street seems to realize that the numbers don’t matter anymore. Any number they go to now does little to impact trade that has largely already stopped between the two countries. We received more inflation data from the wholesale level this morning, but the primary focus continues to be on getting trade agreements that lower tariffs so as to avoid a domestic and global recession. Stocks are modestly weaker, while the VIX is trading near 45, and the dollar is at fresh three-year lows near 99.3. Yields on 10-year Treasuries are trading near 4.49%, while yields on 2-year Treasuries are trading near 3.86%. Crude oil prices are dipping below $60 per barrel, while the grain and oilseed markets traded modestly higher overnight.
The producer price index fell 0.4% month-on-month in March, reflecting deflation at the producer level. That compares to 0.1% inflation in February, and market expectations of 0.2% inflation. The PPI rose 2.7% year-on-year in March, down from 3.2% the previous month, and below analyst expectations of 3.4%. The core PPI that excludes the more volatile food and energy sectors fell 0.1% in March, versus 0.1% gains in February, and versus market expectations of 0.3% inflation. The core PPI rose 3.3% year-on-year in March, down from 3.4% in February, and down from analyst expectations of 3.6%. The PPI for goods fell 0.9% on the month in March, and it fell 0.2% for services. Today’s data again suggests that inflation risks remained low in March, but also that consumer fears about the tariffs risked a deflationary slowdown in the economy. That’s largely what was priced into the markets yesterday, with today’s markets taking this data in stride.
Negotiators from the European Union are expected to be in Washington, D.C. this weekend to discuss how both sides can lower their tariffs. The EU had a retaliation package prepared when President Trump initiated his pause earlier this week, while raising the tariffs on the lone country that thus far had retaliated – China. As such, EU officials chose to pause their retaliation package and to fly to the States to negotiate. Other countries are lined up to do the same as well. Negotiations will be more complicated with Europe, considering President Trump’s 25% tariff on steel and aluminum – which he sees as a national security interest – and his 25% tariff on autos. President Trump will need to start rolling out trade agreements from significant trading partners soon to reassure the markets.
If you can go high, I can go higher. That seems to represent the current tariff bidding war between China and the United States. U.S. reciprocal tariffs went to 145% overnight, as Chinese retaliatory tariffs went to 125%. We’re past the point of the actual number mattering, as trade has essentially shut down. To the typical American, it means not being able to get the consumer product that they want, or else paying more to get it from another source – and there will likely be a number of alternative sources start to pop up. To China, it means losing $430 billion of consumer business, which will be a blow to its manufacturing sector. The sharp drop in the U.S. dollar allowed the yuan to bounce a bit relative to the dollar, but the problem for China is that their currency is now seeing significant declines versus the currencies of its other trading partners, making imports more expensive, although also stimulating demand for what it produces from some of those other countries. Regardless, China cannot replace the scope of consumer demand that it enjoyed from the United States.
The tariff war is challenging China’s commitment to sustaining a strong yuan to be seen as a solid alternative to the U.S. dollar in global trade. However, it now faces the need to allow the yuan to weaken to spur additional demand for what it produces from other countries to help offset what it is losing in trade with the United States. A weaker yuan also risks increased capital outflows, which it cannot afford as well. The markets will be watching for more policy support for China’s economy via rate and bank reserve requirement ratio cuts in the days and weeks ahead, along with additional fiscal stimulus that will again add to China’s debt problem, which already resulted in a credit rating downgrade last week. Meanwhile, the drop in the dollar index to three-year lows combined with the rise in Treasury yields suggest that foreign investors are bringing their money home. That combines with hedging strategies and basis unwinding to decrease the demand for debt certificates at a time when fiscal spending continues to produce a large supply of them. The higher Treasury yields are something that I’ve been expecting for quite some time, but the above speeds up the process, giving us some of our recent volatility in Treasury yields. President Trump wants lower interest rates to stimulate the economy, but that may be a difficult goal to achieve if he can’t sufficiently cut fiscal spending to reduce the supply of debt certificates available to the market. Don’t be surprised if we see the Federal Reserve return to quantitative easing at some point to absorb some of that supply of debt certificates.
The grain and oilseed markets remain the bright spot amid all of the above, with corn prices leading the way as they trade to fresh six-week highs following yesterday’s USDA WASDE crop report. USDA raised U.S. corn exports by 100 million bushels in that report, with more increases possible. It also raised soybean crush by 10 million bushels. That’s a small increase, but the fact that it increased it at all suggests that USDA expects a favorable ruling from the EPA soon on biomass diesel production support. USDA also reported 2 more cargoes of U.S. soybeans sold to “unknown destinations.” Could that be more purchases by Sinograin for its reserve? Tariffs aren’t a problem for a state buyer paying itself the tax.
