The escalating trade war between the U.S. and China could cause interest rate hikes, the very opposite of what President Donald Trump wants, some analysts have told CNBC.
Recent market consensus has suggested that the U.S. Federal Reserve is unlikely to raise interest rates, with Fed funds futures indicating a 76% chance the central bank will instead cut rates by 25 basis points before September. As of Wednesday, futures had also priced in a one-in-three chance that the Fed will cut twice by the end of the year.
Trump has regularly expressed his disapproval of high interest rates and called for the Fed to cut, tweeting Tuesday that the U.S. would win the trade war if the central bank followed his advice.
But some analysts are striking a contrarian tone. Mark Phelps, CIO of concentrated global equities at AllianceBernstein, told CNBC Wednesday that if prices are pushed up because of Trump’s tariffs on Chinese goods, the Fed may respond to the inflationary impact by hiking interest rates.
Central banks will generally raise rates when inflation is predicted to rise above their inflation target, and higher rates tend toward moderate economic growth. This increases the cost of borrowing and can therefore limit the growth in consumer spending.
“Tariffs go up, you’ll see some hit to margin for companies, and that probably reduces their investment — that’s not great for growth,” Phelps said.
He added that higher prices will reduce consumer purchases of goods, also reducing growth.
“There will be an inflationary impact so the Fed is going to have potentially growth slowing and inflation going up — not an ideal set of circumstances, but certainly not something where they’re going to rush out and just cut rates for the sake of it,” Phelps said.
This view was echoed by Giles Keating, senior advisor at Torchwood Capital, who told CNBC “Squawk Box Europe” that the bond markets were “gambling that when inflation does go up, the Fed will look through that and say ‘it’s just higher tariffs,’ that it’s a one-off and it will go away.”
Meanwhile Jinny Yan, chief China economist at ICBC Standard Bank, also told CNBC that while Trump would love to cut interest rates, “probably the opposite direction would be justified because inflationary pressures will hit the United States, therefore hiking the rates might be the thing to do.”
The Fed has indicated that it is not ready to move rates in either direction at this point, but market sentiment remains expectant of a cut by the end of the year.
Yardeni Research President Ed Yardeni said in a note Wednesday that it was “unlikely that the Fed would raise interest rates in response to what would be a one-shot boost to the inflation rate from higher-priced Chinese goods.”
Yardeni also doubted that higher prices would reduce the purchasing power of American consumers, since importers might absorb some of the increased cost of doing business with China, which would squeeze their profit margins instead of passing costs to consumers.
In response, Yardeni argued, some businesses might move their supply chain away from China to avoid the tariff burden, which may mean the Chinese yuan continues to fall and offsets some of the tariff cost.
Pigeons fly past the US Federal Reserve in Washington.
Nicholas Kamm | AFP | Getty Images
Euro zone could benefit from US-China trade war, ECB’s Nowotny says
Ewald Nowotny, governor of Austria’s central bank and European Central Bank (ECB) governing council member, speaks during the “New Opportunities in the Sign of International Networking” event in Vienna, Austria.
Bloomberg | Bloomberg | Getty Images
There could be some upside for the euro area from the ongoing trade war between the U.S. and China, ECB Governing Council Member Ewald Nowotny told CNBC Tuesday.
Escalating trade war has been a concern for the European Central Bank (ECB), partly due to the export-driven nature of the euro area economy. However, speaking to CNBC in Sintra, Portugal, the Austrian central bank governor noted that there could be some opportunities for Europe.
“The euro zone is affected like everybody else but again in a trade conflict (between) China and the U.S. there are a number of options for the euro zone. It might be on the losing side, frankly speaking in some cases it might be on the winning side. So, this depends very much on the specific perspectives,” Nowotny told CNBC’s Annette Weisbach.
“There might be cases of trade diversions,” he pointed out. “If the U.S. is isolating itself increasingly from world trade that would mean there’s a number of trade relationships, there might be more going…to the euro zone, we might have stronger cooperation also in technological ways between Europe and China.
Both sides of the Atlantic have been at odds over trade ever since President Donald Trump took office back in 2016. Since then, the president ended trade negotiations between the U.S. and the EU over a wide-ranging deal (the Transatlantic trade and investment partnership – TTIP), has imposed tariffs on European steel and aluminium products, as well as threatened to slap further duties on European carmakers.
Trump announced last month that he would delay tariffs on cars and auto part imports for up to six months as discussions with the European Union and Japan take place and while he seeks to conclude talks with China. The president had threatened as early as last year that he would slap a 25% tariff on car imports from the European Union.
On Trump’s approach to international trade and remarks that trade wars are easy to win, Nowotny said: “I think it’s totally wrong, one has to be aware that trade wars are extremely risky.”
All-electric jet firm Eviation announces US airline as first customer
LE BOURGET, FRANCE – JUNE 17, 2019: An Israeli Eviation Alice electric aircraft, developed by Eviation Aircraft, on display at the 2019 Paris Air Show opened at Le Bourget Airport. Marina Lystseva/TASS (Photo by Marina LystsevaTASS via Getty Images)
Marina Lystseva | TASS | Getty Images
The Israeli start-up Eviation announced at the Paris Air Show that U.S regional airline Cape Air is to buy its electric aircraft.
Eviation is developing a nine-passenger aircraft designed to fly up to 650 miles at around 240 knots (276 miles per hour). A commercial jet would cruise around 500 miles per hour. The electric plane — called Alice with a prototype being unveiled at the show this week — is designed for the sort of distances usually conducted by train.
Cape Air is set to buy a “double-digit” number of the plane which has a list price of around $4 million each. It’s expected that any customer would be able to negotiate a smaller figure.
The company’s chief executive, Omer Bar-Yohay, told a press conference Tuesday that he expected to receive certification by late 2021, with deliveries predicted for 2022.
“This aircraft is not some future maybe. It is there, ready and waiting,” he said.
Bar-Yohay cited the contributions from Honeywell who built the plane’s controls as well as Siemens, and magniX who provided the electric motor and related functions.
A rendered image of the Eviation Alice. An electric aircraft designed to take 9 passengers up to 650 miles at 240 knots.
Bar-Yohay said the plane would now travel to Arizona in the United States where it would be flight tested before being put forward for certification with the U.S. FAA (Federal Aviation Administration).
The CEO added the plane should satisfy FAA concerns that it might create a backlog of training for pilots, as it was “probably one of the easiest planes to fly,” adding “this is one of the specimens that the FAA wants to see happen.”
The Eviation boss said that eventually, future planes would be built in the United States.
The aircraft comes with roughly 900 kilowatts of power split by three engines provided by magniX. Bar-Yohay claimed if there was a problem with the two wing engines, it could continue flying on the rear rotor only.
The CEO of magniX, Roei Ganzarski, also attended the launch, telling CNBC it was “exciting to see a dream come true.”
Ganzarski said his engines would be split between new clean sheet aircraft such as the Eviation and retrofitting existing small aircraft.
Most of Eviation’s funding is from Clermont Group, the private investment fund of Singapore-based billionaire Richard Chandler. Clermont has given Eviation $76 million in exchange for a 70% stake in the company, according to a filing with the U.S. Securities and Exchange Commission dated January 3.
Italy’s finance minister plays down the idea of a parallel currency
Giovanni Tria Italian Minister of Economy and Finance attends during Festival dell’ Economia in Trento on May 30, 2019.
NurPhoto | NurPhoto | Getty Images
Italy’s finance chief does not see ongoing talks over a parallel currency materializing.
Market players have been wary of parliamentary discussions in Rome regarding an alternative for government debt repayments. Lawmakers are considering a proposal that would see the Italian Treasury issue securities — so-called mini-BOTs (short-term treasury bills) — that could be used by recipients to pay taxes or to buy goods or services from state-owned companies.
However, Giovanni Tria, the country’s finance minister, said Tuesday at a conference in London that he does not think mini-BOTs will be introduced. “We do not need this kind of instrument,” Tria said, according to Reuters. He also added that the introduction of a parallel currency is not on the agenda.
Tria, a technocrat without political affiliation, sounded more moderate than some of his government colleagues.
“We don’t want to create problems in Europe. We have to reinforce the trust in investors in Italy’s finance situations,” the finance minister told the audience.
Supporters of the idea, including one of Italy’s ruling parties, Lega, believe the short-term securities would help the government reduce its outstanding bills. On the other hand, critics argue that it would lead to higher public debt in a country that already has the second-largest debt pile in the euro zone.
The mini-BOTs discussion has also resurfaced fears about Italy’s commitment to the single currency. Prior to the general election in 2018, both coalition parties — the leftist Five Star Movement and the right-wing Lega, spread doubts about the country’s membership of the euro zone.
Since then, both parties have toned down their euroskepticism but one of the main economic minds from Lega, Claudio Borghi, is still openly hostile to the idea of the common currency.
“There are a number of economists, including influential ones close to the Italian government, who believe the euro is a key reason for Italian underperformance, and the leaders of the coalition have never fully put this idea to bed,” Erik Nielsen, group chief economist at UniCredit, said in a note last week.
Both the European Central Bank (ECB) and the International Monetary Fund have sounded skeptical about the mini-BOTs discussion. Christine Lagarde, the International Monetary Fund’s managing director, told CNBC last Thursday: “On this strange financial instrument that has been developed in Italy, we think that there are many better ways to deal with the payment of arrears. It does not require the creation of such instruments. Italian bonds could absolutely do the job … why bother?”
World1 week ago
Kazakhstan election incites violent protest in Nur-Sultan, Almaty
World6 days ago
My skateboard career is the bravest thing I’ve done
Politics1 week ago
Economy added just 75,000 jobs in May, amid trade tensions and global economic slowdown
Latest News1 week ago
Border patrol agent saves woman and son from thousand of bees | US News
World1 week ago
Raytheon and United Technologies agree to all-stock merger of equals
Latest News1 week ago
‘Major scenes of panic’ after fairground ride accident injures 28 | World News
World1 week ago
China may restrict tech access in spiraling trade war with US
World1 week ago
French Minister Le Maire on trade war, economic crisis for the world