Trade War Fears Spook Markets

President Trump announced last week that he is planning a further range of tariffs directly targeted at China. The potential tariffs on $50bn worth of imports are in reaction to what the President has described as unfair trade practices and the theft of intellectual property from American businesses. This follows the initial round of tariffs on steel and aluminium imports and has raised fears of retaliation and escalation from China and the rest of the world. However, the announcements appear to be more of a negotiating tactic rather than an intention to raise trade barriers indefinitely. Treasury Secretary Steven Mnuchin has said that he is optimistic that the US can reach an agreement with China which will avert the need to implement additional tariffs. Nevertheless, equity markets have had a turbulent week as investors have attempted to price in a potential escalating trade war and identify those areas which would be most affected.

UK Jobs Data

Data released last week showed that there was a sharp increase in UK employment during the period from November 2017 to January 2018, against the preceding three months. An additional 168,000 people were in work during the quarter, increasing the employment rate to 75.3% and making it the highest level since records began in 1971. While the potential workforce expanded, the unemployment rate fell to 4.3%, down from 4.7% during January 2017 and equalling the lowest level since 1975. The strong labour market has continued to flow through into improving earnings growth, with annual increases accelerating to 2.8% (including bonuses). It is expected that average earnings growth will overtake the rate of inflation over the next several months, providing a real term boost to individuals.

US Rate Rise

As expected, the Federal Reserve raised interest rates by 0.25%, to a 1.5-1.75% range. This was the first meeting under the new Federal Reserve Chairman Jerome Powell and was closely watched my markets for any change in direction. However, he has kept to the path set out by Janet Yellen, and the market is still expecting that there will be an additional two or three rate rises during 2018, taking the interest rate above 2%. The Fed is taking the opportunity to raise rates and unwind its quantitative easing programme while the US economy is still strong, as it will give them more flexibility to loosen conditions in the future if needed. Furthermore, the tax cuts recently enacted have the potential to overheat the economy, which is already at the boundary of its capacity.

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