This week, the US-China trade battle continued to escalate with the US deciding to apply a 25 per cent tariff on $34 billion worth of Chinese goods from July 6.
The tariff covers just 1.1 per cent of total US imports and so will not have a major macroeconomic impact on its own, but the worry is that it heralds a new era of greater protectionism. The statement from the US also included a threat to respond to any Chinese retaliation to the move.
Still on tariffs, there is also the ongoing US probe into foreign-built automobiles. This investigation potentially paves the way for tariffs on around $350 billion worth of imports and would have a much greater impact if it goes ahead.
While protectionism alone is unlikely to kill off US economic expansion, the concern is that it could worsen any slowdown in the future and add to inflationary pressures, which are already building.
China reacts to US tariff announcement
In the wake of the announcement from Washington, China’s Ministry of Commerce vowed to “immediately introduce countermeasures of the same scale and strength”.
China’s Ministry of Finance said it would begin imposing its own 25 per cent tariffs on 545 categories of US products worth $34 billion, including soybeans, beef, whiskey, and off-road vehicles on July 6.
China also threatened to add a further $16 billion worth of tariffs in the future targeting US energy exports such as coal and crude oil.
Markets react to ECB policy announcement
In Europe, the big news was the European Central Bank (ECB) announcement following its June policy meeting that it will likely end quantitative easing (QE) by the end of the year.
Market reaction to the policy announcement suggests that the ECB’s Governing Council has once again managed to pull off a “dovish taper” by combining the news on QE with a change to its language on interest rates.
The ECB now expects rates to remain at present levels “at least through the summer of 2019 and in any case as long as necessary”, suggesting that its first rate hike could come in September. However, this will depend on the overall health of the Euro economies.
US Fed lifts interest rates
Turning to US economic news, the US Federal Reserve (the Fed) voted to lift the target range for the federal funds rate by 25 basis points to between 1.75 per cent and 2 per cent at its Federal Open Market Committee (FOMC) meeting.
US officials now anticipate a quicker tightening of interest rates than previously communicated to the market, pointing to two more 25 basis point hikes this year and a further three 25 basis point hikes in 2019. Overall, this is a modest shift.
Australia’s unemployment rate dips in May
Meanwhile, Australia’s unemployment rate nudged lower to 5.4 per cent in May while the underutilisation rate held steady, suggesting there is still plenty of slack in the labour market.
RBA Governor Philip Lowe suggested the RBA is increasingly focused on overall labour market slack and not just the unemployment rate as wage growth pressure in the economy remains low.
By contrast, in the US there is evidence that growing wage pressure is beginning to lead to more inflation, with US consumer prices core inflation hitting a 15-month high of 2.2 per cent in May.
Will Donald Trump win a Nobel Peace Prize?
Of course, there was also the closely watched summit between US President Donald Trump and North Korean Chairman Kim Jong Un held in Singapore. Who would have thought.
The most encouraging outcome from the historic meeting was that the two sides have committed themselves to holding further talks between the two nations.
If Kim is genuine about denuclearisation, further talks could be followed by North Korea giving up its nuclear weapons programme, the signing of a formal peace treaty and the lifting of sanctions. This would also have flow on economic effects to South Korea and Japan.