Macro Overview – March 2018

Volatility was rampant throughout the markets as fear of inflation and rising interest rates pilfered gains that had accumulated from the beginning of the year. Some see a fundamental trend is in place as a normalization of interest rates evolves.

The release of a jobs report in early February was the catalyst for volatility, as the pace of wage growth was greater than expected thus raising the specter of more aggressive Fed tightening to combat inflation. The Federal Reserve communicated that it is on track to raise rates three to four times this year, stating that “substantial underlying economic momentum” exists for further rate increases.

Historically when markets experience a volatility spike as we experienced in February, a strong economy is a buffer against any long-lasting downturns. Regardless of the catalyst, both stocks and bonds tend to regain their footing following such an environment.

The abrupt rise in bond yields over the past month is in anticipation that the Fed will continue to raise short-term rates this year. The 10-year Treasury yield, which is established by the markets, rose to 2.87% in February from 2.46% at the beginning of the year. The higher yield on U.S. debt is starting to attract additional foreign assets relative to lower yields from other developed countries. The increase in rates is beginning to affect consumer loans from homes and autos to credit cards, and quite possibly offsetting the initial benefits of the recently passed tax cuts.

The roughly 50 percent increase in crude oil prices from lows in June 2017 has helped push inflation higher over the past few months of which oil is an integral component. Economists do not consider inflation a threat to economic prosperity as long as it is gradual and controlled, of which inflation is measured by the Consumer Price Index (CPI).

The Labor Department said the cost of employing the average American worker rose 0.5% in the final three months of 2017 and was up 2.6% in the 12 months ending in December. That’s the biggest 12-month gain for the employment cost index in almost three years. There was a 2.9% jump in average hourly earnings over the past year, the highest increase since June 2009. The average work week fell to 34.3 hours from 34.5 hours.

Sources: Labor Dept., BEA, Federal Reserve, Bloomberg

 

What A Tariff On Steel & Aluminum Means – Trade Policy

A report released on February 16th by the Department of Commerce prompted the President to enact tariffs on steel and aluminum imports entering the United States. The imposed tariffs, essentially a tax on steel imports of 25% and 10% on aluminum imports are in response to the findings of the Commerce Department report and carried out under Section 232 of the Trade Expansion Act of 1962.

Detailed in the Section 232 report are findings that excess imports into the United States of steel and aluminum pose a threat of “weakening of our internal economy” and “threaten to impair the national security” of the country.

The United States is the world’s largest importer of steel, with imports exceeding exports by nearly four times. Demand for steel and aluminum is driven by various industries including automotive, aerospace, consumer goods, and defense. Steel and aluminum are also indispensable materials used in building and expanding a country’s infrastructure.

Ten steel furnaces have closed since 2000, displacing over 52,000 U.S. steel workers since January 2000. Meanwhile, international production of steel is up over 127% since 2000, employing tens of thousands of workers globally. China is by far the largest producer of steel worldwide, as well as the largest source of excess capacity, which is why China is a target for the new tariffs. China alone produces more steel in one month than the U.S. does in a year.

Several countries are being targeted for the newly imposed steel tariffs, notably Canada, Brazil, South Korea, and Mexico. The Section 232 report has determined that these countries have been selling steel into the U.S. market at below market prices, thus dumping steel onto the market. The dumping practices of these countries has led to unfair competition by U.S. steel firms, not allowing them to gain market share. Meanwhile, world steelmaking capacity has increased 127% since 2000, reaching 2.4 billion metric tons. Global excess capacity is 700 million tons, nearly 30% of this total.

Between 2013 and 2016, U.S. aluminum industry employment fell by 68%. Six smelters shut down, and only two of the five remaining smelters are operating at full capacity, despite an increase in U.S. demand for primary aluminum. There is only one remaining U.S. producer of high-quality aluminum alloy needed for military aerospace needs, and maintaining and upgrading our infrastructure, which must be done for reasons of economic security, is a major use of aluminum.

Many are worried about what the impact will be for American consumers and businesses. Economists believe that the initial effect on consumers will be slightly higher prices for aluminum can products and autos. The automotive and aerospace industries will initially be impacted until U.S. steel and aluminum producers come online to restore ample supply. Many see the dynamics as short-term pain for long term gain.

Sources: Dept. of Commerce, ITA Global Steel Trade Monitor, December 2017, Commerce.gov/section232