“Goods To Hit With Tariffs…”

Goods To Hit With Tariffs

The United States and the EU have been battling for almost 15 years at the World Trade Organisation over subsidies given to US plane maker Boeing and Airbus, its European rival.   After some victories for both sides, each is asking a WTO arbitrator to determine the level of countermeasures they can impose on each other.  Amongst the items of an eleven-page list of US imports worth $20 billion, that the European Union on Wednesday said it could hit with tariffs are handbags, tractors, shovels and fish. Meanwhile last week the trump administration proposed targeting a seven-page list of EU products for tariffs, ranging from large aircraft to dairy products and wine, in order to prevent harm from the EU subsidies for Airbus estimated at $11 billion.  Brussels replied with its own list of some $20 billion worth of US imports, including agricultural produce from dried fruit to ketchup, planes, fish, tobacco, handbags, suitcases, tractors, helicopters and video game consoles.  The published list will now be open for consultation until 31st May and could then be revised.  WTO arbitrators are yet to set an amount, but the US case against Airbus is in a more of advanced stage, possibly June or July, while the EU case against Boeing could come early in 2020.

German Manufacturing Sector

Germany’s manufacturing Purchasing Managers Index disappointed for the fourth month in a row, adding concerns and pushing investors to move into safer assets such as eurozone government bonds.  Although Germany’s services sector rose to a seven-month high in April, according to a survey on Thursday, investors focused on the 44.5 reading for the manufacturing sector well below the 50.0 mark which separates growth from contraction even if it was above the 44.1 reading recorded last month.   After the data, the euro tumbled by a quarter of a percent to the day’s low at $1.1265 whereas before the data it traded at $1.1304.

Euro-Area Economy

The euro area economy slipped at the start of the second quarter with weakness in manufacturing spilling over into services.  A Purchasing Managers’ Index that measures private-sector activity in the euro area unexpectedly slid in April.  After the reading, the euro which was already down after disappointing German factory numbers, extended its decline.  The reports show manufacturing in the euro area shrank for a third month, led by an ongoing slump in Germany.  Whilst Germany’s services sector and France showed signs of stabilizing, the overall picture is that the euro region economy is in its worst growth phase since 2014.  The composite euro-area PMI suggest the economy is running at quarterly growth of just under 0.2 percent.

UK Inflation

UK inflation unexpectedly stayed below target last month as higher fuel prices were offset by the cost of food and computer games.  Annual consumer-price growth remained at 1.9 percent, lower than the Bank of England’s 2 percent goal, said the Office for National Statistics on Wednesday.  Core inflation remained at 1.8 percent.  Lack of inflationary pressure gives policy makers time to keep interest rates on hold until the Brexit issue is solved.

UK Wage Growth

Worker’s pay grew in the UK to its fastest pace in over a decade as employers increased hiring, adding to signs that uncertainty about Brexit is prompting firms to take on workers rather than committing to longer-term investments.  According to official data, total earnings, including bonuses, rose by an annual 3.5 percent in the three months to February.  This contrasts with other readings of British economy.  Employment increased by 179,000 in the three months to February helping to keep the unemployment rate at 3.9 percent, its lowest since early 1975, said the Office for National Statistics.

US Trade Deficit    

US Trade deficit fell to an eight-month low in February, as exports to China increased, helping and covering a rebound in imports.  The Commerce Department said on Wednesday that the trade deficit dropped 3.4 percent to $49.4 billion, which is the lowest level since June 2018 (January’s trade gap:  $51.1 billion).   Trade data in recent months had been volatile, as imports and exports moved with the conflicts between the US and China.  When adjusted for inflation, the overall goods trade deficit fell $1.8 billion to $81.8 billion in February.

US Manufacturing Output

US manufacturing output was unchanged in March, after two months of declines, that lead to the largest quarterly decrease in production since 2017.  Production at factories dropped at 1.1 percent annualised rate in the first quarter, being the first quarterly drop since the third quarter of 2017 and followed a 1.7 percent pace of increase in the October-December period.  Motor vehicles and parts production dropped 2.5 percent last month after an increase in February of 2.3 percent.  Weighing on production is an inventory overhang in the automobile sector, that contributes to factory employment, declining in March for the first time since July 2017.  Meanwhile, excluding motor vehicles and parts, manufacturing output rose 0.2 percent in March, amid increases in the production of primary metals, computer and electronic products after a fall of 0.5 percent in February.  The outlook for the manufacturing sector which accounts for 12 percent of the economy is cloudy and manufacturing is slowing as the stimulus to capital spending from the $1.5 trillion tax cut package diminishes.

China’s First Quarter Growth

China’s economy grew at a steady 6.4 percent pace in the first quarter, as industrial production jumped sharply and consumer demand showed signs of improvement.  The upbeat readings and the faster investment growth come as Beijing and Washington appear to be close to a trade deal.  Investors see China’s slowdown and the trade war as the main factors that contributed to slowdown in global economy.  This year Beijing has ramped up fiscal stimulus to support growth, by announcing billions of dollars in additional tax cuts and infrastructure spending, while Chinese banks lent a record 5.8 trillion yuan in the first quarter.  As China’s slowdown had an impact on trading partners from Japan to Germany, equity markets and most currencies in Asia climbed higher.  Growth for the quarter was supported by a sharp jump in industrial production, which surged 8.5 percent in March on the year, which is the fastest growth in over 4 ½ years.  Output of construction materials  such as steel and cement, as well as machinery, showed strong gains.  Exports rebounded more than expected in March, however according to analysts, the gains could have been due to seasonal factors rather than a rebound in global demand.  Total social financing (TSF) which is a broad measure of credit and liquidity in the economy, quadrupled in March to 2.86 trillion yuan.

OECD About China

As Beijing has stepped up fiscal stimulus to prevent a sharper slowdown in China, the OECD reported on Tuesday that China’s stimulus measures will shore up economic growth this year and next but may undermine the country’s drive to control debt and worsen structural distortions over the medium term.  Local governments will be allowed to issue 2.15 trillion-yuan ($320.6 billion) worth of special purpose bonds in 2019 to fund infrastructure projects which is an increase of 59 percent from last year.  Meanwhile the S&P Global Ratings estimated last year, that local governments were already on hidden debt that could be as high as 40 trillion yuan.  The OECD said that China’s corporate debt has fallen to about 160 percent of gross domestic product (GDP) due to a multi-year clampdown on riskier types of financing and debt, but the level was still higher than in other major economies.  It further added that, China’s fiscal stimulus could be as high as 4.25 percent of GDP this year, up from 2.94 percent in 2018.  New bank loans rebounded more than expected in March, totalling a record 5.8 trillion yuan for the quarter, as policymakers pushed lenders to support struggling smaller, private companies that are seen as higher credit risks than state-controlled firms.  This however raises concerns as looser lending standards could fuel a further rise in bad loans and speculation in the property market in particular.  Data on Tuesday highlighted the warnings by the OECD, as growth in home prices accelerated in March after cooling since November 2018.  According to OECD, China’s economic growth is likely to slow to 6.2 percent this year which is the weakest in nearly 30 years, and growth is expected to cool further to 6 percent in 2020.  In 2018 the economy expanded by 6.6 percent.

Canada’s Trade Deficit

According to Statistics Canada, Canada’s trade deficit declined for a second straight month in February, falling slightly to C$ 2.9 billion after reaching a record high of C$ 4.8 billion in December 2018.  Exports declined 1.3 percent to C$48 billion in February from January on lower shipments of non-energy products.  Energy product exports rose 11.7 percent to C$ 9.3 billion, while oil shipments increased 8.5 percent at C$6.1 billion.  Excluding energy, exports fell 4 percent and exports for motor vehicles and parts fell 2.8 percent in February, amid lower exports of passenger cars and light trucks.  Auto-production in February also fell.   Whilst gaining for two consecutive months,  imports declined by 1.6 percent to C$ 50.9 billion led by lower imports of gold.


On Monday oil fell, after comments from Russia’s finance minister said Russia and OPEC may decide to boost production to fight for market share with the United States, where output remains at record highs.  On Tuesday Brent oil slipped to around $71 a barrel pressured by expectations of higher US inventories and concern about Russia’s willingness to stick to OPEC led supply cuts.  While the OPEC supply cuts have boosted Brent by more than 30 percent this year, gains have been limited by concerns that slowing economic growth could weaken demand for fuel.  In its monthly drilling productivity report on Monday, the US Energy Information Administration said that US crude oil output from seven major shale formations is expected to rise by about 80,000 barrels per day in May to a record 8.46 million bpd.  Meanwhile, US rig count, which is an earlier indicator of future output, remains higher than a year ago.  In China which is the world’s second-largest oil consumer, refinery output, eased from record highs in March after maintenance shutdowns offset production from a new mega refinery.  According to data from National Bureau of Statistics, refinery output in March rose 3.2 percent from a year earlier. For the month, China pumped 16.54 tonnes of crude oil up 2.1 percent from a year ago and the highest daily level in at least a year.   The increases showed that efforts by state-run oil firms to accelerate domestic drilling paid off, halting the decline in the country’s output over the past three years.

Global Steel Demand

Growth in global steel demand will weaken over the next two years amid slowing economies, a sluggish manufacturing in China and the Sino-US trade war, said the World Steel Association (worldsteel) on Tuesday.  Demand growth will decline to 1.3 percent in 2019 and 1 percent next year, following the 2.1 percent in 2018, said the association.  Worldsteel further added in a statement that China which consumes about half of the world’s steel, has seen its economy decelerate mildly while the government continues to steer the country away from investment-led to consumption-led growth.  The long standing conflict between the US and China has also hurt investment.  Worldsteel pegged demand this year at 1.735 billion tonnes followed by 1.752 billion tonnes in 2020.  Demand from developing economies excluding China will rise 2.9 percent and 4.6 percent in 2019 and 2020 respectively.

Bond Yields

The difference between British and German bond yields was at its widest in almost two-and-a half years on Monday as the latest news about Brexit has prompted investors to sell British gilts.  10 year British gilt yields increased to their highest to hit a high of 1.235 percent pushing the spread over the equivalent German bond to 117 basis points.  With the fears of a no-deal Brexit, gilt yields dropped below 1 percent for the first time since September 2017.  In addition, last week the European Central Bank raised the prospect of supporting the European Union which is struggling as a result pushing down the yields on German government debt. Meanwhile on Wednesday US Treasury yields drifted lower from four-week highs as Wall Street shares lost steam and investors got back in the market after a recent sell-off.  Meanwhile, this week is short, as Friday financial markets are closed for the Good Friday holiday.  US yields earlier extended their rise after data showed the US trade deficit fell to an eight-month low in February as imports from China plunged.   The US 10 year note yields slipped to 2.59 percent down from 2.594 percent late on Tuesday, while the US 30-year bonds were also down at 2.991 percent from 2.993 percent on Tuesday.  Since hitting a more than one year low in late March, after the Federal Reserve indicated that it will hold off raising interest rates for now, the benchmark US 10-year yields have risen roughly 27 basis points.   On Thursday the 10-year German bund yield rose to a one month high of 0.10 percent overnight, a sharp rebound from a 2 ½ year low of minus 0.094 percent at the end of March.    US Treasury yields rose from early lows on Thursday after US retail sales data in March beat expectations rising by 1.6 percent, easing concerns about a potential economic slowdown.

Markets Wrap

European shares ended higher on Monday as telecom and retail stocks lead gains amid optimism on Sino-US trade talks and strong Chinese economic data that eased some concerns about global growth.  Markets cheered the progress in the US-China trade talks after US Treasury Secretary Steven Mnuchin said on Saturday he hoped that the United States and China are close to the final round of negotiations.  Meanwhile lacklustre earnings from big US banks weighed.  Bank stocks that lead the gains earlier in the day on last week’s earnings beat from JP Morgan, slipped after the results from Goldman Sacks and Citigroup.  On Tuesday European shares ended at an eight-month high, bolstered by banking and financial stocks, upbeat data from China and improved economic mood in Germany.  Wednesday saw European stocks ending higher led by a rally in auto stocks as better than expected data from China relieved investor’s concerns. On Wednesday Wall Street shares drifted lower and the S&P 500 gave up 0.2 percent as a drop in healthcare equities outweighed upbeat economic data from the United States and China.   On Thursday Asian shares dipped amid subdued trade, after losses on Wall street and some profit-taking, ahead of the long Easter weekend.

Malta:  Harmonised Index of Consumer Prices (HICP) For March 2019

In March 2019, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) remained at a constant rate of 1.3 percent.  The largest upward impact on an annual inflation was measured in the Food and Non-alcoholic Beverages Index, while the largest downward impact was recorded in the Education Index.  The HICP measures monthly price changes in the cost of purchasing a representative basket of consumer goods and services and is calculated as specified in European Union Regulations.  The HICP is used for comparing inflation rates across the EU.

Antonella Mercieca

Client Relationship Manager


Bloomberg, Reuters, https://nso.gov.mt


April 18th, 2019

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