Trump targets China, and the Fed hikes once again

Author: Portfolio Specialist Group

March 26, 2018

AGF Weekly Perspectives

“A recap of last week’s top economic news and what’s to come”

Trump targets China with new tariffs

  • The Trump administration announced further tariffs, this round targeted specifically towards China, following accusations of China stealing U.S. intellectual property and “hollowing out” the manufacturing sector. Global financial markets reacted negatively to the news on Thursday, with both the S&P 500 and Hang Seng falling 2.5%, while the Nikkei lost 4.5%.
  • The proposed 25% tariff on approximately US$50-60 billion in Chinese imports amounts to approximately US$12.5 – $15 billion and will target a broad range of sectors including robotics, aerospace, rail equipment and electric vehicles. Trump also plans to impose new investment restrictions on Chinese companies within 60 days that will serve to block Chinese investment in similar strategic sectors.
  • China immediately responded, unveiling reciprocal levies on US$3 billion of imports coming from the U.S. and plans to take legal action against the U.S. under the World Trade Organization framework.

U.S. Fed hikes at Chairman Powell’s first meeting

  • As expected, the U.S. Federal Reserve (Fed) raised interest rates by 25 basis points, bringing the Fed target range to 1.50-1.75%. The Fed upgraded their GDP growth forecast to 2.7% in 2018, up 0.2% and 2.1% in 2019, up 0.3%. Inflation expectations were also revised slightly higher to 2.1% for both 2019 and 2020.
  • In his first meeting as Fed Chairman, Jerome Powell impressed analysts with a calm, well-balanced press conference, acknowledging that the economy “has strengthened in recent months”, yet tempering speculation of four hikes this year.
  • The latest hike, and the sixth of the current cycle, was significant in that for the first time in a decade, the Fed’s key policy rate has exceeded core PCE inflation, the Fed’s primary measure of price pressures.

Canadian inflation surges

  • Canadian price pressures grew at the fastest pace in three years with inflation rising 0.6% in February, bringing the annualized pace to 2.2%.All major categories except food and clothing/footwear reported higher prices during the month. Restaurant prices rose 4.0% year over year, while auto prices and mortgage interest costs also added to inflation.
  • All three of the Bank of Canada’s core inflation measures increased during the month, averaging 2.0%, to reach six-year highs.
  • Also reported, Canadian retail sales rose 0.3% in January, partially offsetting a sharp drop in the prior month. Volumes were soft, however, with only a 0.1% increase.

Other economic news

  • Eurozone manufacturing activity slipped to a 14-month low of 56.1 in March after dropping 2.0 points. Japan’s manufacturing Purchasing Managers Index (PMI) also decelerated for a second straight month to 53.2, down 0.9 points. Positively, U.S. activity reached a three-year high of 55.7 with a strong improvement in overall business conditions.
  • The Bank of England held interest rates unchanged as expected, though the central bank’s optimistic tone opened the door to a further hike in May. Also reported during the week, U.K. inflation decelerated to 2.7% in February, down from 3.0% previously, though still well above target. Unemployment also ticked lower to 4.3% in the fourth quarter of 2017, returning to 43-year lows, with average hourly earnings rising to 2.6% annualized, the fastest pace in over a year.

What’s to come

Canadian GDP and Japanese data

  • A shortened work week in North America will give rise to a lighter dose of economic data, highlighted by Canadian GDP for the month of January. Overseas, a busy week in Japan with industrial production, inflation and unemployment reports due on Thursday.

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