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Macro Watch

US-China trade war escalates, Fed poised to hike, Italy’s Budget divisions

Home / Perspectives / Macro Watch: US-China trade war escalates, Fed poised to hike, Italy’s Budget divisions

Silvia Dall’Angelo, Senior Economist
23 September 2018
Macro Economics


In a week of robust data flow, the second round of US tariffs on Chinese imports will take effect, the Federal Reserve is expected to further tighten its monetary policy, and the divisions in economic policy come sharply into relief over the Italian Budget.

The US will impose tariffs on $200bn of Chinese goods, and China will retaliate by placing duties on $60bn of US goods. Markets will focus on whether US President Donald Trump escalates the trade war given that he has threatened to increase tariffs on all Chinese imports if China strikes back. Meanwhile, this round of US tariffs is expected to directly impact consumers and further increase costs within supply chains (see Chart of the Week below).

The latest reading from the German IFO Business Climate Index will be released. It rose to 103.8 in August – the highest since March – and is consistent with annualised growth rates of 2-2.5%. But the intensification of international trade tensions is likely to cause the gauge to decline.

The Federal Open Market Committee meets and is likely to increase the benchmark US interest rate by 25bps to a range of 2-2.25%, as suggested by recent communications. This would hardly surprise financial markets: Fed fund futures are pricing a 100% probability of a hike. As the policy rate is now approaching the Federal Reserve’s estimated 2.9% neutral rate, the bank may stop defining its current monetary-policy stance as accommodative. The dot plot, which currently flags a fourth and final rate hike in 2018 and three more next year, is unlikely to be changed significantly at this meeting, reflecting little change in the Fed’s economic forecasts. Chairman Jerome Powell is likely to stress gradualism and data dependency during the press conference following the meeting.

At its September meeting, the Reserve Bank of New Zealand is likely to hold the nation’s benchmark interest rate at 1.75%. In August, the bank expressed concerns about the economic outlook and unexpectedly committed to keep interest rates at record lows through to 2020.

US President Trump will chair the UN Security Council meeting on Wednesday. Earlier this month, Nikki Haley, US Ambassador to the United Nations, suggested the president would focus on Iran, upon which the US re-imposed economic sanctions in August.

The Italian Budget will take shape. The government will present its fiscal targets, ahead of a fully detailed document by 20th October. There is some apprehension in financial markets, as a three-way division has emerged within the government. Finance Minister Giovanni Tria’s reassuring message of endorsing an orthodox approach respecting the fiscal rules clashes with those of the two main parties in the governing coalition: the League’s desired 15% flat tax and the Five Star Movement’s universal income guarantee. Each policy is expensive, and combining the two would amount to about €100bn, or 6% of GDP, and blow the deficit. Our base case is that the government will respect the fiscal rules at this stage but debate will continue and there is still a risk of missing a compromise. According to media reports, the fiscal target under discussion is 1.6-2% of GDP for 2019, which is higher than last year’s 0.8% of GDP but in line with this year’s likely outcome and is likely to be accepted by Brussels.

The latest reading of the Economic Sentiment Indicator for the eurozone will be announced. The index – which tracks confidence in the industrial, services, consumer, construction and retail sectors – has trended down from a cyclical high of 115.2 in December to 111.5 in August. By historical standards, this level should be associated with an annualised growth rate of about 2%.

China’s manufacturing PMI is expected to continue the downward trend from August, when it read 50.6 – its lowest since June 2017. The trajectory is likely to continue in September, reflecting the double hit from past de-risking measures and recent escalation of trade tensions with the US. Recent fiscal and monetary easing measures might result in some stabilisation later this year.

The latest eurozone inflation figures, as measured by the Harmonised Index of Consumer Prices (HICP), will be released. Headline and core HICP inflation rates are likely to be unchanged for September at 2% and 1% respectively. Over time, headline inflation tends to converge towards core inflation, making the persistent weakness in core inflation somewhat concerning. Nonetheless, the recent increase in wage inflation suggests that core inflation should gradually improve going forward. In the short term, base effects should lift core inflation slightly in Q4 this year.

The consensus view is that US inflation – according to the Personal Consumption Expenditure prices index, the Fed’s preferred gauge of inflationary pressures will remain stable at 2% for August. As the Consumer Price Index and Producer Price Index figures for August were weak, there is a risk of a 1.9% print.


US tariffs on Chinese goods: impacting American consumers Source: Source: US International Trade Commission and the Peterson Institute for International Economics (Chad Brown) as at July 2018.

The US tariffs on $200bn of Chinese imports will be initially set at 10%, rising to 25% in January 2019. Consumer goods comprise 23% of the targeted products, meaning that US shoppers will be directly impacted this time, while the first tranche of tariffs focused on manufacturing components. To read more about the escalating trade tensions and their effects, see Protectionism: the $1tn question.


The impact of the technological change on the labour market, inequality amid the US’s economic recovery and the continuous state of reform within the International Monetary Fund (IMF) are among the interesting reads you might have missed.

The future of work

In his latest speech, Bank of England Governor Mark Carney considers the challenges and the opportunities that the Fourth Industrial Revolution poses to the labour market and the implications for monetary policy.

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A wealthless recovery? Asset ownership and the uneven recovery from the great recession

This Federal Reserve note uses microdata on US households to show that the great recession and ensuing recovery have been accompanied by an increase in wealth inequality. The ‘wealthless recovery’ for the bottom 90% goes some way to explaining the weaker link between aggregate wealth and consumption in recent years.

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IMF reform: the never-ending quest

Based on a recent report by four prominent economists, this Vox column analyses the changes in financial markets and in governance arrangements for the IMF over the last two decades. Despite increased emphasis on financial regulation and greater resilience of the system, the IMF still faces significant challenges.

Read now >

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Silvia Dall’Angelo Senior Economist

Silvia joined Hermes in October 2017. As an experienced global economist, she is responsible for providing macroeconomic analysis and commentary, non-standard macroeconomic modelling, and developing relationships with key central banks and monetary authorities. Silvia previously spent 10 years at Prologue Capital Ltd, latterly as a global economist responsible for the team’s macroeconomic view. She holds a Master of Science in Economic and Social Sciences, as well as a Bachelor in Economic and Social Sciences, from Bocconi University in Italy.

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