Last Wednesday, on the heels of the USTR’s decision to publish a list in conjunction with prospective tariffs on an additional $200 billion in Chinese goods, commodities had their worst day since 2014.
It was a largely indiscriminate bloodbath and it suggested markets are beginning to fret about the possibility that an all-out global trade war could trigger across-the-board demand destruction.
That episode underscored the inherent ambiguity surrounding the implications of the spiraling trade conflict. Ostensibly, protectionism should be inflationary and there are very real concerns that tariffs risk complicating an already precarious situation for Jerome Powell. The Fed is concerned that piling fiscal stimulus atop a late-cycle dynamic in the U.S. could turbocharge inflation in the event the Phillips curve reasserts itself as it’s wont to do in late-stage expansions (remember “Cheshire cat’s smile“?)
“A reversal of trade integration/openness trends implies a steeper Phillips curve, increased sensitivity to domestic economic conditions, higher inflation outcomes in the long term (all else equal) and higher inflation volatility”, Barclays wrote last month.
Unless of course Trump’s trade war ends up deep-sixing global growth, in which case trade wars could easily produce deflationary outcomes, effectively negating the decade-long effort on the part of DM central banks to reflate the global economy following the crisis.
Well, on Thursday, commodities fell into correction territory, and as Bloomberg notes, “almost all of the 22 raw materials comprising the Bloomberg Commodity Index have fallen since the May peak, with only live cattle, cotton and orange juice futures bucking the trend.”
Particularly disconcerting from the perspective of global growth is the plunge in metals. Here’s the LMEX:
This is all a bit perilous for emerging markets. Since May, developing nation stocks and currencies have fallen ~8% and 4%, respectively and this comes amid an already challenging backdrop as an unapologetic Fed continues to hike in the face of mounting evidence that EM isn’t likely to remain as resilient as Jerome Powell suggested in comments delivered at an IMF/SNB event in May.
Finally, do note that this is all highly tethered to the fate of the Chinese economy.
The activity data out of China, while not “rolling over” per se, continues to point to a steady deceleration. Whether you want to join the “hard landing” crowd is largely irrelevant – the point, rather, is that authorities in Beijing are beginning to loosen policy in what looks like a clear sign that they’re concerned about the outlook in an environment where trade frictions have the potential to tip the scales in favor of slower growth.
Take all of that for what it’s worth, but if it’s canaries you seek, you might try looking in the commodities coal mine.