Author: Matt Peterson Editor: Li Jingying
U.S. stocks rose sharply on Monday after the Trump administration said it would not impose super-large tariffs on China, but the market and economic path forward remains unclear.
The stock market finally breathed a sigh of relief. U.S. stocks rose sharply on Monday after the Trump administration indicated it would not impose super-large tariffs on China, but this was like celebrating a victory without shooting itself in the foot.
When the confetti and empty champagne bottles from Monday's rally were cleared, the road ahead for markets and the economy still looked foggy.
A deal with China has yet to be reached, U.S. tariffs on China and other countries remain at levels that could deal a severe blow to the U.S. economy, and tax reform, another major policy initiative the Trump administration hopes to use to boost growth, is far from complete and is moving in a direction that could exacerbate bond investors' concerns.
The Dow Jones Industrial Average surged more than
1,100 points on Monday after U.S. Treasury Secretary Bennett and U.S. Trade Representative Greer said in Geneva that the United States would only impose tariffs on text="">An additional tariff of 30 percentage points, rather than the previously threatened 125 percentage points. The 25% tariffs imposed on most Chinese goods during Trump's first term remain unchanged.
U.S. Treasury yields rose, including 10-year and 30-year Treasury yields, which may reflect that traders are rotating out of fixed income and into riskier stocks.
But whether the trade truce will produce a lasting peace remains to be seen. At a press conference after the agreement was reached, Bell said that if the United States did not issue serious threats, they would never get China to sit down at the negotiating table. Even if one agrees with this view, however, opening negotiations will not be enough to resolve the long-term economic problems between the United States and China. That will require tougher negotiations, which currently must be conducted with the knowledge that the United States may back off due to new pressures in financial markets.
The backdrop to all this is that Trump and Bennett have pledged to maintain most of the new tariffs they imposed, including tariffs of up to
55 percent on Chinese goods and 10 percent on goods from the rest of the world. White House Press Secretary Karoline Leavitt confirmed last week: "The President is determined to maintain the 10% baseline tariff."
Yale Budget Lab
Lab estimates that this level of tariffs (China tariffs plus the base tariff) could cost the average household $2,300 and shrink the U.S. economy "by 0.4% on an ongoing basis."With slower growth looming and the Federal Reserve wary of potential price increases, the Trump administration will be eager for tax reform to help boost growth. But that won't be easy as the U.S. debt situation is going from bad to worse.
Joshua Rauh, Professor of Finance at Stanford University and Senior Fellow at the Hoover Institution
(Joshua Rauh) style="font-family:Songti SC Regular">said:"The biggest risk to Trump's economic plan, the biggest risk to the current overall direction is the deficit and the debt."The debt held by the public is equivalent to about 100% of U.S. gross domestic product
(GDP), and at this level, even a small change in interest rates can have a huge impact on taxpayers. Congress is acting as if adding more debt is okay, but Law said Congress may be assuming the wrong thing. Bond traders have warned that a new risk premium has formed in the $28.6 trillion U.S. Treasury market, driven by uncertainty about U.S. policy. The nonpartisan Congressional Budget Office predicts that in 10 years, the federal government will pay 22 cents of every dollar it spends in interest. But that painful forecast assumes that the 10-year Treasury bond will average 3.8% over the next decade. "Is there any reason to doubt this? You can get the market's forecast for what the 10-year Treasury yield will be 10 years from now. That's called the 10-year forward rate on the 10-year Treasury bond, and it's more than a percentage point higher than the CBO's forecast," said Law. If that doesn't change, 29 cents of every federal dollar in spending will go toward interest payments, Labor said. Tax talks could resolve the issue, but progress so far has been unencouraging. The House Ways and Means Committee on Monday unveiled details of a sweeping tax bill, with one surprise: a proposed increase in the cap on state and local taxes that is dividing Republicans. But it is unclear how to piece together the policies to win votes from nearly all Republicans in both the House and Senate.
As if the legislative stakes weren't high enough, Republicans also need to raise the debt ceiling by August. Foreign investors appear to be paying attention: They reduced their purchases of U.S. Treasuries at last week's auction of 30-year bonds. The warning signs in the bond market were obvious to anyone who cared to pay attention.
It's easy to think of the tariff and tax processes as separate. But stock investors need to understand how the two are linked. "Every rally eventually hits this point: a shift from reacting to news to needing something deeper to believe," analyst Jawad Mian wrote in his newsletter Stray Reflections on Monday. "The trade news brought relief, and the dollar has been buoyed by the coronavirus pandemic." text="">Tax cuts offer hope. If legislation falters, or the package is watered down, it could weaken the rally. This is a delicate handoff: from trade to taxes, from story to substance, from optimism to results. That's the fragility of this moment. "
This administration could still pull off a successful handoff, and the abandonment of blockade-level tariffs on Chinese goods may buy the administration some breathing room.
But this is not the end of the negotiations, it's just the beginning, and the ending has yet to be written.
Anais
Weatherly
Alex
Miyuki
Weiliang