‘The Last Thing We Need’

“Our US Economics team is of the view that the intent of the tariffs increase is an attempt to show action on the immigration issue while also pressuring congressional Democrats to pass USMCA [but] per our US team, while still possible, enactment of USMCA prior to the 2020 election would no longer be the base case if the tariffs on imports from Mexico are implemented as proposed”, Goldman’s Alberto Ramos wrote Friday, in one of the multitude of notes penned in the wake of Donald Trump’s decision to slap tariffs on Mexico.

As it turns out, the move was opposed by Bob Lighthizer, who feared it would put the USMCA in jeopardy. Ultimately, Trump took the advice of immigration hardliner Stephen Miller, whose sway over the president has increased coincident with the worsening of the situation on the border.

“This new threat may end up being postponed after diplomacy, but will be used as leverage by the US administration”, BNP lamented on Friday, adding that “the ghost of tariffs is likely to accompany us throughout the USMCA approval process, in our view.”

(BNP)

The news came at an inopportune moment given what’s happened over the past three weeks between Washington and Beijing. The timing was made worse by China’s Friday announcement that the country is establishing an “unreliable entities list”, aimed at punishing companies complicit in America’s efforts to undercut Huawei. News that Xi’s rare earths plan is ready to go didn’t help.

Read more: America The ‘Unreliable Entity’ Prompts China To Establish Corporate Blacklist

All in all, it was a fittingly sour end to the second-worst May for US equities since the 1960s. The month started with a Twitter trade escalation and it ended the same way it began.

There’s little utility in rehashing things when you’ve documented it all in real time. Be that as it may, a couple of visuals are in order, I suppose. It was, of course, the worst month for the S&P since the December rout and although it didn’t feel like it, May wasn’t that far behind December in terms of the overall loss.

The VIX rose the most since December (top pane in the visual below) and as noted first thing Friday morning, the bond rally has gone “mental“. The combination of growth jitters, rate cut bets, recession concerns and hedging dynamics pushed 10-year yields to 2.12% on Friday.

2-year yields fell more than 22bp on the week, the biggest weekly drop since the crisis years. Both JPMorgan and Barclays now see rate cuts in September, if not sooner. This is pretty remarkable:

High yield is obviously widening back out and stocks look like they have the potential to drop further to “catch up”, although the visual in the top pane below is something of a “chart crime”. The bottom shows HYG falling for a fifth consecutive week (and a sixth out of seven).

Not helping junk was crude, which turned in its worst May in seven years. Friday was obviously a bloodbath. This is what it looks like when folks are worried about demand destruction tied to a global economic downturn:

Energy shares have fallen for eight weeks in a row. Meanwhile, the SOX ended up logging its worst monthly loss since the crisis. It had been headed in that direction all month long and there was no respite.

As for tech, this was the worst month for the S&P 500 info tech index since 2008. By the time the closing bell sounded on Friday, tech shares were down nearly 9% in May.

Suffice to say the trade war has come home – at least on Wall Street. And according to just about everyone you care to ask, it’s about to make landfall for the US economy as well.

On Friday, the US Chamber of Commerce said it’s exploring legal options to respond to the Mexico tariffs. CNBC reported that “business groups more broadly are discussing the possibility of suing the White House [and] a decision on how to proceed is expected by Monday.” Reuters underscored the point, noting that “lawyers who advise large corporations said clients were interested in pursuing legal action to block the tariffs, but declined to identify the corporations.”

Finally, in a true testament to how dour the situation really is, beer drinkers are furious. Below, find an official statement (seriously) from the Beer Institute, whose CEO Jim McGreevy reminds you that “the last thing we need is more hardship imposed on American beer drinkers.”

Amen, Jim. Amen.

WASHINGTON, D.C. — Jim McGreevy, Beer Institute President and CEO, issued the following statement on President Trump’s proposed tariff on Mexican imports — including beer:

“The Beer Institute and its members urge President Trump and his administration to reconsider imposing another tax on the beer industry.

“The beer industry is a thriving economic engine for America. Imposing a tax — and tariffs are taxes — on the largest import country of the beer industry would harm the 2.1 million Americans who owe their livelihoods to beer. Whether it be the truck driver, farmer, distributor, local retailer or favorite tavern, every community in America will be affected by this decision.

By the end of the year, America will have imported more than 360 million cases of Mexican beer. Most Mexican beer sold in this country is made from barley and hops grown in the United States. Beer accounted for more than 1 percent of Mexican goods imported into the United States last year — that’s $3.6 billion out of $346.5 billion.

The proposed tariff, which will start at 5 percent of the import value and increase by 5 percent each month until it reaches 25 percent, will constitute a $12.5 million cost increase to beer industry importers during the month of June alone, and that cost will reach $374 million by the end of 2019. If the tariff remains at 25 percent, the cost to the beer industry will be $984 million per year.