On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Rob Cittadini, director, Americas institutional, discussed escalating trade tensions between the U.S. and China, the upcoming meeting of the U.S. Federal Reserve (the Fed) and Turkey's recently unveiled economic plan.
Trade war ramps up between U.S. and China
The U.S. and China are essentially in a trade war now, Robison said, with the U.S. set to impose a 10% tariff on roughly $200 billion worth of Chinese imports beginning Sept. 24. Unless something changes, the rate will increase to 25% on Jan. 1, 2019, he noted. In return, Robison said, China has vowed to implement a retaliatory tariff on roughly $60 billion of U.S. imports. So, what are the likely ramifications of all of this?
"Costs for producers will go up, and this increase will probably be passed along to consumers in the form of modestly higher inflation," Robison stated. Interestingly enough, financial markets have largely shrugged off the escalating tensions, he said - especially in the U.S., where both the Dow Jones Industrial Average and the S&P 500® Index hit record highs the week of Sept. 17.
Interest-rate hike expected at upcoming Fed meeting
The next Fed policy meeting is Sept. 25-26, Robison said, and he and the team of Russell Investments strategists are expecting the central bank to deliver another interest-rate increase. Why? "The Fed has a dual mandate of stable prices and full employment-both of which are being met, due to inflation that's roughly on target and a strong labor market," he remarked.
The more interesting aspect of the meeting will be the statement that comes out of it, as well as the ensuing press conference, Robison said. "At Russell Investments, we'll be looking to see what the Fed's forward-guidance language entails, and what the central bank is primarily concerned about," he said. As for whether or not the trade war between the U.S. and China could influence the Fed's thinking, Robison doesn't think it will - at least not in the short-term. "While trade tensions are a big source of uncertainty, the issue hasn't derailed any of the Fed's plans yet, and I believe there'd have to be some damage done before the Fed does anything different," he concluded.
Turkey announces new economic plan
Turning to emerging markets, Robison said that concern remains about the potential contagion effects of Turkey's ongoing financial crisis. The country raised interest rates by roughly 6% on Sept. 13, he noted, in an effort to stave off high inflation. Then, on Sept. 20, Turkey released a new economic plan, which in Robison's mind should serve as good news for emerging markets. "The plan specifies lower growth forecasts and modest tightening of fiscal policy in 2019," Robison noted, "which, in my opinion, helps put the country on a more sustainable path going forward." The plan likely means short-term pains, but long-term gains, for Turkey, he concluded.
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