This morning President Donald Trump announced that the United States will impose a 25% tariff on imported steel and a 10% tariff on imported aluminum “for a long period of time.” The President said he will sign a formal order next week.
The timing couldn’t be much worse as far as global financial markets are concerned. Global markets are coming off a big drop on fears that Chinese exports and global trade are slowing raised by recent numbers showing a slowdown in Chinese exports. This morning U.S. stock markets looked like they were stabilizing after yesterday’s 381 point, 1.5% drop in the Dow Jones Industrial Average on those worries. The markets had even digested Senate testimony from Fed Chair Jerome Powell about the strength of the U.S. economy.
And then came official word of the tariff hikes. The Dow Jones Industrial Average had at peaked for the day so far at 25,176 at 10:35 a.m. and then began to fall. After a slight rally at 11:30, the market began to move seriously lower until at 2:30 p.m. the Dow was down 504 points or a full 2%
I’m using the Dow Jones Industrial Average today rather than the Standard & Poor’s 500 index because the Dow focuses on those big U.S. global exporters where the tariff increase is raising the biggest fears. Boeing (BA), which lives and dies with its ability to sell its planes overseas–including into China–is off 3.8% at 2:30 p.m. Similarly Caterpillar (CAT) is off 3.73%. Since the Dow weights its 30 component stocks by share price, a high-priced stock such as Boeing ($348 a share right now) moves the index more than a $92 a share stock such as Microsoft (MSFTWealth Strength IndexMSFT is Moderately Flat and trending Up). A dollar drop in Boeing is good for about a $7 drop in the Dow Industrials.
The fear in the market after the announcement from the White House is that the U.S. move will lead to retaliation by China and other trading partners against U.S. exporters. I think China is almost certain to hit back at Boeing, for example.
There’s also the question of what these tariffs (and earlier measures such as duties on imported washing machines) will do to U.S. economic growth. To economists higher tariffs, which raise the price of goods, are equivalent to an increase in taxes, interest rates, or inflation in that they act to slow the economy.
So this morning we’ve had economic data pointing to strong growth in the U.S. economy and tariff news that points to slowing growth.
The Federal Reserve will be burning the mid-night oil tonight in an effort to figure out what the bottom line results of all this will be.