FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest in the US-China trade war, the strength of the US dollar, and more critical news around the world. For the full newsletter, subscribe today.
Trump, upset over strong dollar and high interest rates, attacks Fed
- President Donald Trump took to twitter on Wednesday, calling on the Federal Reserve (Fed) to cut rates in order to both reduce the costs of new investment, and to push down the value of the dollar.
- The value of the US dollar, as measured by the US trade-weighted broad dollar index, rose to all-time highs on Tuesday. The previous high was set in 2002.
- A strong US dollar makes US exports more expensive and imports cheaper, which runs counter to Trump’s broader policy agenda of reducing the US trade deficit and repatriating manufacturing jobs to the US.
- Trump has written an escalating series of tweets in which he has pushed the Fed to cut rates by another 1%, and consider further quantitative easing.
- The prompt for Trump’s latest tweet was the widely publicized news that Germany issued 30-year bonds at a negative yield. US yields remain far higher – partly due to far higher Fed benchmark policy rates – though US 30-year bond yields also hit an all-time low of 2%.
Global economic concerns have picked up substantially in the previous month, leading to a large increase in demand for low-risk safe assets that tend to outperform during recessionary periods. This has pushed up the value of safe assets, like the US dollar and long-term government bonds. Amid an ongoing global manufacturing slowdown, Trump’s problem is that the more pressure he puts on China and the EU in his trade wars, the worse the global outlook becomes, and the more upwards pressure there is on the US dollar as a flight-to-safety asset. If the US economy weakens enough that the Fed actually implements 100bps in rate cuts, this would be a further sign of global weakness spreading that would likely push the US dollar up even higher.
Continue to expect a strong US dollar for 2019 and 2020. The Fed will not implement rate cuts with the goal of weakening the value of the US dollar, and the US Treasury (which technically is responsible for currency policy) has very limited tools at it’s disposal to achieve this goal. Though at least one more Fed rate cut is expected in 2019, rate cuts will do little to impact the value of the US dollar unless global economic uncertainty falls.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
US increases Huawei blacklists, but grants 90-day reprieve
- On Monday, the US Department of Commerce added 46 Huawei companies/associates to the US entities black list, banning US companies from doing business with them.
- However, the Chinese tech company was also granted another 90-day reprieve, which covers more sensitive technologies like Android OS systems.
- Huawei has already experienced significant reductions in sales numbers due to growing US-China trade tensions, new blacklisted entities will accelerate this trend for the company.
Huawei will continue to face increased blacklisting unless China enacts significant policies to protect US intellectual property. However, increased pressure on Huawei is unlikely to push China into making fundamental changes to its economic model. Fundamental differences between the US and China will remain and will continue to cause frictions, leading to gradual decoupling of the two economies, regardless of any short term trade truce that might be struck.
Expect the US and Chinese economies to continue to decouple in 2019. This will create lasting changes to supply changes, especially in the tech and information sectors. We expect firms to face increasing operating costs in the short and long-term.
Emilie Newton, Junior Analyst for Global Economics and Scenarios
FrontierView clients: See our most recent China Quarterly Market Review for further insights