Wall Street finally blows up over Trump's failing trade war

It seems like Wall Street was due for a blowup the past few weeks, as markets had jumped far ahead of what the US's economy and general instability would indicate. It seemed like it was going to happen last week, but there were a lot of days where buyers would swoop in later in the day after the DOW had dropped a few hundred points, and prevented a rout.

That didn't happen today, and a major bloodletting was the result.

The S&P 500 (^GSPC) fell 2.41%, or 69.53 points, as of market close. The Dow (^DJI) fell 2.38%, or 617.38 points, after earlier in the session being down more than 700 points. The Nasdaq (^IXIC) declined 3.41%, or 269.92 points.

China is set to impose a tariff rate of as high as 25% on a portion of $60 billion worth of U.S. goods starting June 1, the Chinese government announced Monday. The move is an apparent retaliation against the recent hike to levies the Trump administration implemented on billions of dollars worth of Chinese imports late last week.

On Friday, the Trump administration raised the rate of tariffs on $200 billion worth of Chinese imports to 25%, and announced that further tariffs on another $300 billion in imports would be forthcoming. Trump has claimed repeatedly that China “broke the deal” the two sides had been working toward over the past several months, leading to the use of tariffs to try and extract further concessions.

The sudden end to five months of a trade ceasefire with China rattled markets, dragging the S&P 500 to its worst weekly decline since just before Christmas. Meanwhile, haven assets have continued to rise, with the yield on the 10-year Treasury note falling to [2].3874%, or the lowest intraday level since the end of March.

None of that is good. And the attempts by the Trump Administration to improve the terms of trade with tariffs seems to be backfiring badly.

The alleged goal of the tariffs was to encourage manufacturing in America and increase wages. But hiring in that sector didn't improve after the tariffs were put in place last Summer and has slowed sharply over the last 3 months. In addition, manufacturing wages are growing slower than in the country as a whole.

Job growth manufacturing, US
Jan 2017-Jan 2018 +193,000 (+16,083 a month)
Jan 2018-July 2018 +146,000 (+24,333/month)
July 2018-Jan 2019 +119,000 (+19,833/month)
Jan 2019-Apr 2019 +12,000 (+4,000/month)

12-month average hourly wage growth, US, Apr 2019
Manufacturing +1.9%
All jobs +3.2%
Change in CPI +2.0%

And the countermeasures that other countries have put onto American products have caused major problems for agriculture, depressing prices even more than they already were. The latest Producer Price Index report shows numerous farm products continue to drop in price, lowering profits and driving many out of business.

12-momnth change, Producer Price Index
Finished foods +1.0%
Finished crude foods -0.7%
Foods for export -3.3%
Pork -4.2%
Fruits and melons -6.5%
Grains -6.6%
Oilseeds (soybeans) -15.3%
Eggs -46.8%

One of the few areas in the food sector that's seen decent price increases in the last year has been dairy products, up by 4.1%. But it's "too little, too late" for many Wisconsin dairy farmers, as prices were down for several years before that, and the farm failures continue to pile up in our state.

And one last thing about today's tariff-driven selloff on Wall Street. Remember the reference to the 10-year note dropping to its lowest levels in 2 months? UW's Menzie Chinn noted that it meant we hit a situation that has guaranteed a recession every time it's happened for the last 40 years.

Inversion at Close-of-Business 5/13. Constant maturity 10yr-3mo = -0.01% (first time this cycle as far as I know) Picture of on-the-run yields none too pretty either:#recession pic.twitter.com/XdwGgqP6d2

— Menzie Chinn (@menzie_chinn) May 13, 2019

Tomorrow and the rest of this week could prove quite interesting in the financial markets, and despite a strong March, it makes me wonder how things will keep going as the temperatures warm. Especially if the Trump trade wars don't cool off, because their randomness and the countermeasures they bring on is hurting things as of now.