Markets dive as Trump's tariffs threaten global growth

Dow sank 354 (closing at the lows), decliners over advancers 5-2 & NAZ slumped 114.  The MLP index was off 1+ to the 243s.  Junk bond funds were sold & Treasuries continued in heavy demand.  Oil tumbled to the 53s & gold surged 18 to 1310 (more on both below).

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The Trump administration is ramping up pressure on House Speaker Nancy Pelosi to take up a new trade deal between the US, Canada & Mexico, but fresh tariffs on Mexico could further complicate a process already mired by a bitterly divisive political environment in DC.  Outside of the future of the US–Mexico–Canada Agreement (USMCA) which is designed to replace NAFTA, the new duties could also impact ongoing trade negotiations with China & lead to higher consumer prices, particularly if the White House scales the tariffs at the pace it forecasted.  The administration is hoping the latest trade threat will force Mexico to take action to curb the crossing of undocumented individuals into the US, though it has largely avoided providing any specific metrics.  Should the demands not be met, the 5% tariffs beginning on Jun 10 would rise to 15% on Aug 1, 20% on Sep 1 &, ultimately, 25% on Oct 1.  Combined with the existing tariffs on $250B in Chinese goods, as well as the potential that administration imposes duties on another $300B , by Oct the US could have a 25% tax on nearly $900B in goods from China & Mexico, 2 of the country's largest trading partners.  Domestic firms would have difficulty importing the products they need from elsewhere if double-digit tariffs are imposed on both Canada & Mexico, given the other large US trading partners – including Canada, the UK & Japan – are insufficient substitutes.  That would likely mean higher prices for consumers, as businesses seek to mitigate the impact on their own operations.  In a sign of the significance of the action, the tariffs drew near nearly unanimous backlash from industry groups.

Trump’s Mexico tariffs draw immediate rebuke, threaten USMCA deal and China trade talks

Consumer spending slowed in Apr while inflation was up, but still far below the target set by the Federal Reserve.  The Commerce Dept said that spending increased 0.3% in Apr following a 1.1% surge in Mar that had been the largest increase in nearly a decade.  Personal income growth, which had been lagging in recent months, jumped 0.5% in Apr.  Inflation, as measured by a gauge tied to consumer spending, increased 1.5% in Apr compared with a year ago, up slightly from a 1.4% 12-month change in Apr.  The Fed tries to manage interest rate policy to achieve annual price gains of 2%.  However, in the first 3 months of this year, inflation fell farther from this goal.  Pres Trump has argued that the slowdown in inflation shows that the Fed is keeping monetary policy too tight & should start cutting interest rates.  The Fed raised rates 4 times last year but then reversed course in Jan & has signaled that it plans to keep rates unchanged this year.  However, Trump has argued that Fed policies are hurting the economy & the central bank should be slashing rates instead of keeping them steady.  Fed Chairman Jerome Powell & other Fed officials have attributed the slowdown in inflation to temporary factors which should reverse in coming months & have argued that the Fed's wait-&-see approach on further changes in interest rates is appropriate given how low unemployment is currently.  The 0.5% gain in incomes followed 3 months of tiny changes & was the best showing since a 0.9% jump in Dec.  With incomes rising faster than spending, the saving rate increased to 6.2% of after-tax income in Apr, up from 6.1% last Apr.  The gov reported yesterday that the overall economy, GDP, grew at a solid 3.1% rate in Q1.  But ½ of that gain was based on temporary factors that are expected to fade in the current qtr.  Economists believe that consumer spending, which accounts for 70% of economic activity, will rebound this qtr after slowing in Q1 but they still think overall GDP will slow to a growth rate of around 1.5%.  For Apr, spending on durable goods such as autos fell 0.8% after a 3.6% jump in Mar, while spending on nondurable goods such as food & clothing rose 0.7%.  Spending on services such as utilities & doctor visits rose 0.3%.

US consumer spending slows to 0.3% gain in April

US household sentiment fell at the end of May from earlier in the month as consumers worried about renewed trade tensions.  The University of Michigan said its final index of May consumer sentiment index was 100, up from 97.2 in Apr but down from May's initial estimate of 102.4.  The forecast called for a final reading of 101.

U.S. Consumer Sentiment Dropped in May

Oil prices slumped to a 3-month low as concerns about Pres trump's trade policy & the slowdown in the Chinese economy cast doubt on the outlook for global demand.  Front-month Brent crude futures, the intl benchmark, traded down 2.6% at $63.60, having earlier dipped to their lowest level since mid-Feb.  US benchmark WTI dropped 2.4% to $55.25, its lowest price since early Mar.  The steep declines came alongside a broad retreat in riskier assets after Pres Trump announced a plan to impose escalating tariffs on Mexican imports starting Jun 10.  The US is a major importer of Mexican crude, & refineries relying on the supply could face difficulties replacing it once tariffs are imposed.  Adding to the gloom was disappointing manufacturing data in China Opens a New Window. , which raised concerns that Beijing's efforts to rejuvenate growth are faltering in the face of trade tensions with the US.  The combination of US sanctions on Venezuela & Iran, along with tariffs on Chinese & Mexican goods, is harming investor confidence in the global economy, analysts said.  The latest price fall completes a torrid month for oil markets.  Brent lost more than 11% in May, which would be its worst single month since Nov.  Energy prices made a strong start to 2019 as major producers cut back output, but fears that trade frictions & a downturn in the world economy will hit demand have sent prices spiraling lower in recent weeks.  Global oil supplies fell by 300K barrels a day in Apr, according to the most recent report by the International Energy Agency, partly driven by declining output in Iran.  In the US, the Energy Information Administration reported yesterday that inventories of crude oil fell slightly last week, though the decline wasn't as much as expected.

Crude oil prices tumble to 3-month low

Gold prices surged, advancing to their highest level since early Apr with fears about a slowing economy pushing some investors toward safer assets & the $ declining.  Gold for Jul delivery, the most-active futures contract, rose 1.4% to $1311 a troy ounce.   Despite recent stock-market volatility, prices are only slightly higher for the month & year with many analysts preferring the safety of Treasuries & the $.

Gold Hits Highest Point Since Early April

This was an usually dreary day for stocks.  Trump's surprise announcement about new tariffs on Mexico caught investors by surprise.  Stocks were sold at the opening & the bulls stayed away all day.  The Dow closed at its low, finishing the month down 1800.  Worse, the outlook is for more selling with so much nervousness about global growth, beginning with the US economy.  Until the trade scene calms, selling will continue in stocks.

Dow Jones Industrials

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