US-EU trade war likely to be averted: Peter Cardillo, Spartan Capital Securities

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US-EU trade war likely to be averted: Peter Cardillo, Spartan Capital Securities

Peter Cardillo, Chief Market Economist, Spartan Capital Securities, says Germany, Italy and France could agree on concessions and that should be enough to get the whole of the EU to make these concessions.

Let us talk about this white flag of sorts or perhaps a dove that has been released by Angela Merkel on the trade wars. Would you believe that this is essentially Germany blinking first when it comes to the tariff trade war?

It looks as though as far as the European Union is concerned, they are beginning to realise that if the US imposes stronger tariffs, it is going to affect their economy in a serious way. Remember that United States imports many European products and it is vital for the European Union to take steps to avoid a full-blown trade war. It was reported German Chancellor Angela Merkel would be willing to back cuts on tariffs on U.S. cars imported to the European Union as part of a reciprocal agreement to resolve a trade spat with Washington. We saw that in yesterday’s trading when in the States and in Europe, the auto stocks did exceptionally well . We probably would see some sort of a deal work out. There will be some sort of concession by the EU and that would probably be acceptable to Mr Trump. Remember Mr Trump also needs to avoid full-blown trade war with Europe, otherwise he runs the risk of putting the European economy and US economy into recession.

We can see why Germany is so concerned about tariffs on the auto sector. But how likely is it that the other nations in the European Union will support it and will be willing to negotiate a deal with Trump?

If Germany takes a lead, then it is quite obvious that the rest of the EU members are going to basically agree. Now there might be some hesitation on the parts of a few of the EU members but by and large, you will see Germany, Italy and France basically uniting and that should be enough to get the whole of the EU to make these concessions.

About the tariffs on China, we can assume that come 12 am and those tariffs are going to come into effect. But nevertheless, the Fed has still said that they are going to go ahead with two rate hikes. We have seen the dollar index decline as well. In such a scenario, would this be a prudent decision to adopt or would it be better for the Fed to hold fire?

As far as the Fed is concerned, we saw in the Fed minutes today that they are worried about trade war impacting the economy and the global economy as well. As far as the hawkish stance goes, they are worried about inflation. In the labour market, today we will get a glimpse of new jobs getting created but it is just a matter of time before the shortage shows in certain sectors of the labour market. Wage is much higher and that is an inflation problem for the Fed.

The Fed made it quite clear that they do not want the economy to overheat. Obviously they are referring to an inflationary spiral and so they are going to stay on the path of raising rates. I have been saying that they were looking at four rate hikes this year, possibly five. But I am not too sure of that fifth hike anymore because of the tariff situation. Four seems to be a pretty much consensus and probably what is needed to stem wage inflation from wrecking the economy.

Why is the Fed not too concerned about the economic disruptions? A lot of experts have time and again talked about not only the US economy but the world economy at large which is at a risk given the ongoing disruptions. Why are they still not factoring that in?

One of the reasons is simply because the European economy is strong and the Chinese economy is doing okay. They they are concentrating on the inflationary aspect and the tight labour market seems to be on their mind more than anything else.

You need to focus on here is the fact that we have oil prices that are trading above $70, now that is transitory inflation but it is going to show up and that means that it is probably going to be passed on to the consumer. Gasoline here in the states was gone above $3 and it is possibly headed to maybe $3.50 by the end of this summer and so that is another headache for the Fed.