Markets signal to US and China on the trade war: You have ‘blundered into a minefield’

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Markets signal to US and China on the trade war: You have ‘blundered into a minefield’

15 May 2019

The threat of the U.S.-China trade war escalating into something beyond nasty rhetoric and modestly effective tariffs for the most part has been dismissed by market participants and economists.

But the idea that the dispute could turn into something more is starting to become reality.

“The bottom line here is pretty simple if not altogether positive: markets are signaling that both the US and China have blundered into a minefield,” Nicholas Colas, co-founder of DataTrek Research, said in a note Tuesday. “The risk of a US recession is rising, sharply and quickly.”

Colas points to the various indicators on inflation, rates and concerns over the Chinese dumping U.S. Treasurys as indicators from the markets that the two sides should heed, much the same way as the Fed took cues that it was making a policy mistake by continuing to raise interest rates.

There is an assortment of concern pointing toward tougher times ahead:

· The New York Fed’s gauge of recession probability over the next 12 months is now at 27.5%, easily the highest since the financial crisis.

· The Citi Economic Surprise Index, which measures actual data readings vs. expectations, just recently bounced off its lowest reading in nearly two years and remains well in negative territory.

· Inflation expectations are dimming as well, with the spread between the 5-year Treasury note and the 5-year Treasury Inflation Protected Security — known as the “breakeven” — pointing to 1.75% inflation, below the Fed’s desired 2% level.

· Investors continue to reprice Fed rate actions, with a nearly 50% chance now assigned to a September cut and a 29% probability of two quarter-point reductions before the end of 2019, according to the CME. The change intimates a loss of confidence in growth and expectations that the central bank will have to step in and ease policy. Though Minneapolis Fed President Neel Kashkari told CNBC on Monday that he doesn’t see a change in policy ahead, the market feels differently.

Reference: CNBC

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