At a Glance
- 2019 is shaping up as a challenging year as the unintended and powerful indirect effects of a prolonged U.S.-China trade war start to expand exponentially.
From a corporate earnings perspective, the trade war has barely mattered in 2018. 2019 will be a much more difficult earnings year, and with tough comparisons to 2018, as earnings growth slows.
Most companies are reporting good profits but many are also seeing pressure coming from the trade-war tariffs. In their forward guidance, companies impacted by the trade war are reporting that pressure is rising on margins. In turn, companies are pressing their vendors to absorb some of the tariff costs. And down the road, the whole economy might see one-time, temporary, pressure on prices which will hit in 2019.
In addition to earnings, these are a few other trade-focused stories to watch in 2019.
Soybeans Supply Chain
China is redirecting purchases to Latin America. Brazil is the big winner. U.S. farmers are the big losers. If Brazil and Argentina plant more soybeans in 2019, trade patterns may be permanently shifted. Indeed, we can already see in the 2018 data, looking through the natural seasonality, that Brazil is ramping up soybeans exports at a very good clip.
Emerging Market Demand for Oil
Due to the trade war, China has stopped buying U.S. oil. Also, related to the trade war and rising U.S. rates, there has been considerable foreign exchange turmoil in emerging market countries.
FX turmoil has made oil, priced in U.S. dollars, more expensive, and this has dampened emerging market demand for oil. Overall globally, oil demand is decelerating. At the same time, production is rising in many areas. Iraq is at record production. Libya is coming back on line. U.S. shale producers continue to expand production. Saudi Arabia has promised to make-up any production losses from the Iran sanctions.
Yield Rise in 10-year Note
As noted, trade war tensions coupled with rising U.S. rates have hit many emerging market currencies. One result of currency turmoil is that in 2018, foreign investors are buying fewer U.S. Treasuries.
A lack of foreign buying may explain part of the yield rise this fall as U.S. 10-Year Treasury Notes broke through the 3 percent resistance line and helped ignite some serious equity market volatility.
The bottom line is that from earnings to soybeans and oil to Treasuries, 2019 is shaping up as a challenging year as the unintended and powerful indirect effects of a prolonged U.S.-China trade war start to expand exponentially.
Remember, nothing in economics is linear and many indirect effects occur with significant lags. Until they show up in the data, the lagged impacts can encourage complacency from those that are only looking at current data.
We highly recommend a forward-looking approach to thinking about 2019. Many things changed in 2018. The year brought higher U.S. rates, a serious and escalating U.S.-China trade war, and considerable emerging market FX turmoil. These are big changes, and most of their impacts will not hit economic data until 2019.