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Economic Insights

In our view, the effects of recently imposed tariffs likely will not have a significant impact on the current U.S. GDP trajectory.

Until recently, financial markets appeared to have settled into a period of relative complacency about global trade, reassured by hopes that continuing U.S.-China discussions would yield some positive results at an indeterminate date in the future. Those hopes were upended on May 10 following the breakdown of negotiations between the two countries, and the subsequent move by the Trump Administration to raise tariffs on $200 billion of U.S. imports from China from 10% to 25%. For its part, China announced on May 13 its plans to raise duties on certain American imports starting June 1.

Needless to say, the implications of the escalating trade tension have created a great deal of uncertainty around global growth, asset prices, and central bank policy. This is quite apparent in the latest reading of the widely followed Baker, Bloom, and Davis U.S. Economic Policy Uncertainty Index.

 

Have Tariffs Fueled Market Uncertainty? Certainly.
Baker, Bloom, and Davis U.S. Economic Policy Uncertainty Index (weekly), January 1, 2012–May 13, 2019

Source: Bloomberg and Economic Policy Uncertainty. Data as of May 13, 2019. Index measures policy-related economic uncertainty based on three types of underlying components: newspaper coverage of policy-related economic uncertainty; the number of federal tax code provisions set to expire in future years; and disagreement among economic forecasters as a proxy for uncertainty.

 

Traders are extrapolating the intensifying tariff war into worsening global economic growth and an increased probability of monetary easing by the U.S. Federal Reserve (Fed). Indeed, based on Bloomberg data, markets are now pricing a greater than 40% chance of more than one 25 basis point easing by the Fed over the next twelve months.

Other developments point to the market’s darkening mood. Major global equity indexes have experienced renewed volatility, including sharp declines on May 13. Copper prices, a market bellwether for economic growth expectations, have fallen sharply compared to gold prices, a benchmark for systemic market risk. To top it all off, the U.S. three-month/10-year U.S. Treasury yield curve re-inverted on May 13.

Taking a Step Back
Amid the current volatility, we think the market’s concerns need to be put into context. While fears of global recession are sure to intensify in the short term, it’s worth noting that overall financial conditions, as measured by the Chicago Fed Financial Conditions Index, remain very accommodative, with the index signaling the easiest conditions in more than a decade. And market liquidity, as represented by the U.S. three-Month TED spread, which measures the difference between the interest rate on short-term U.S. government debt and the interest rate on interbank loans, reinforces the notion that financial conditions remain supportive of economic activity.

Moreover, while spikes in uncertainty are never good for financial markets, and there is plenty to worry about beyond trade friction between the United States and China, we believe the increase in tariffs is taking place at a fortuitous juncture. With U.S. GDP very close to potential and inflation consistently undershooting expectations in recent years, we believe that the chance that the unambiguously negative effects of higher tariffs can be absorbed without unhinging expectations about the future paths of the U.S. and global economies is greater than usual. Thus, unless conditions continue deteriorating, we think a buying opportunity among shell-shocked global asset classes should emerge relatively soon.

For a longer term view of the markets and their dynamics, visit www.lordabbett.com/en/campaigns/2019-midyear-outlook.html.

 

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Basis point is a financial unit of measurement that is 1/100th of 1%.

The Chicago Fed National Financial Conditions Index (NFCI) is an indicator of financial stress and tightness of credit markets compiled by the U.S. Federal Reserve Bank of Chicago.

Gross Domestic Product (GDP):  The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

LIBOR (London Interbank Offered Rate) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

The TED (Treasury-Eurodollar) spread represents the difference between the three-month Treasury bill and the three-month LIBOR based in U.S. dollars.

Treasuries are debt securities issued by the U.S. government and are secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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