The Business News Week In Review

The effects of March's tariffs on steel and aluminum are beginning to appear in economic reports. Some of the information is anecdotal, like that of the Federal Reserve's Beige Book which reports that price increases, some "dramatic", are being fed through to customers. And others are soft data coming from small sample regional reports where stress and price increases are clearly apparent. We'll also touch on where the first signs of tariff effects are likely to appear in the definitive economic data that are yet to be released.

The economy

In what may be an early effect of tariffs and talk of trade war, expectations in the Empire State manufacturing report have literally plummeted this month. The 6-month outlook collapsed  nearly 26 points to only 18.3 which is very weak for this reading. The last decline of this size occured in early 2016 during the brief meltdown of the Chinese stock market. Before that, the most severe fall came in reaction to 9/11 which was 17 years ago. But recovery from here will hopefully be quick, unless of course new tariff troubles emerge. Showing a less severe reaction is the expectations reading in the Philly Fed manufacturing report which nevertheless did fall more than 7 points to a 10-month low.

The Philly Fed report stands out, not so much for the decline in expectations, but the rise in selling prices which is another possible effect of tariffs. Current selling prices (light green area in graph) are up more than 9 points this month to 29.8 which is a 10-year high and an unmistakable echo of the week's Beige Book. The prospect of pass through isn't holding back expectations for future selling prices which, near 50, are at a 30-year high. And the need for pass through is an increasing one given the rise underway in input costs which are up this month to a 7-year high.

Tariff stress, that is the need to pay more and possibly stock more, is hitting manufacturers at a time when capacity is already being stretched. This is a big understatement for those manufacturers who respond to the Empire State and Philly Fed surveys and who are reporting unusually severe delays. Delivery times in the Empire report are showing the most slowing in 17 years of records while at 20.7 for Philly's delivery index, slowing is the most severe in 50 years of records.

Unusual stress is also appearing in the workweek of these surveys. Empire State's, at 16.9, is the highest in more than 10 years while the Philly Fed reading of 21.6 is the highest in 30 years. Longer deliveries and a rising workweek are consistent with diminishing capacity to meet demand. This poses the risk, at least for these samples, of inflation, something which tariffs will be adding to. Let's just step back a minute and remember that small sample surveys, like Empire and Philly, have been heating up for the last year, a bit more so than the actual manufacturing sector nationwide. But both these reports are closely watched and these records are in fact just that, records.

Another industry showing capacity issues and that will be affected by the tariffs is mining which produces the basic materials for steel and aluminum. Mining output has been taking off since President Trump's victory and it easily topped the March industrial production report at an index of 118.2. Mining volumes are rising at a double-digit pace with capacity utilization at 90.1 percent, this compared to only 75.9 percent for manufacturing. A greater need to supply domestic metals, as the metals industry shifts away from exports, is hitting mining at a very busy time. As of the March industrial production report, however, tariffs didn't have much effect though they didn't give much of a boost to construction supplies where output slipped in the month.

Metals are an important part of construction, whether for building materials or equipment. Reports of disruptions to the sector emerged immediately after the tariffs were announced in March. Any supply snags would not be welcome in housing where single-family units, which is key for the market, are in short supply. The tariffs probably didn't have much of an effect on single-family construction in March but they didn't help. Starts fell 3.7 percent in the month to an 867,000 rate while completions fell 4.7 percent to an 840,000 rate for their sharpest decline in eight months.

Another place to watch for tariff effects is the 6-month sales component of the housing market index which is produced by the nation's home builders. Rising costs and limited access to materials and equipment could begin to pull down this component which, along with other readings in the report, have already been edging lower this year. Builders are in a hurry to feed a badly under-supplied housing market and tariffs may not help. And in as much as tariffs limit the supply of homes or raise costs, customer traffic, the bottom line in the graph, may begin to struggle even more.

Despite talk of stockpiling, the jury is still out whether the tariffs tripped a measurable rise in inventories. The first indications on this will be inventory data in the coming week's durables goods report for March which tracks the manufacturing sector. Inventories at both manufacturers and especially wholesalers were already on a significant climb going into the tariffs as seen in the accompanying graph.

Another area where tariffs may have an effect, and arguably a positive one at least initially, is employment. The Beige Book noted that steel and aluminum manufacturers in the St. Louis area are reopening their facilities and calling back workers. Manufacturing payrolls have been on a solid rise but March's data didn't show any evident effects. The April employment report, where general indications aren't that favorable, will be the data highlight of the April 30 to May 4 week.

Markets: Treasury yields back in the news!

It's usually not good news when the headlines are about the bond market and not stocks. The 10-year Treasury yield has been climbing noticeably at the same time (and this may be no coincidence) that tariffs are appearing. Tariffs raise the price of imports and limit the ability of suppliers to keep prices down for their customers. What's key is not so much the steel and aluminum imports already imposed but the risk that further tariffs, both U.S. and foreign, may now be around the corner. Inflation erodes the value of bonds (at least those bonds that aren't inflation adjusted) and the less demand there is, the higher the yields go. Higher yields won't be any help for finance-sensitive sectors, especially housing, and they could mean an end to dollar depreciation as foreign investors, seeking higher yields, move into dollar assets. The 10-year Treasury yield, at 2.96 percent and a 4-year high, rose a very steep 14 basis points in the week bringing its year-to-date climb to 55 basis points with the dollar index, at 90.41 and near a 4-year low, up 0.7 percent in the week to cut its year-to-date decline to 2.0 percent.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2017	13-Apr-18	20-Apr-18	Change	Change
DJIA	24,719.22	24,360.14	24,462.94	-1.0%	0.4%
S&P 500	2,673.61	2,656.30	2,670.14	-0.1%	0.5%
Nasdaq Composite	6,903.39	7,106.65	7,146.13	3.5%	0.6%
Crude Oil, WTI ($/barrel)	$60.15	$67.31	$68.25	13.5%	1.4%
Gold (COMEX) ($/ounce)	$1,305.50	$1,347.60	$1,337.80	2.5%	-0.7%
Fed Funds Target	1.25 to 1.50%	1.50 to 1.75%	1.50 to 1.75%	25 bp	25 bp
2-Year Treasury Yield	1.89%	2.36%	2.46%	57 bp	10 bp
10-Year Treasury Yield	2.41%	2.82%	2.96%	55 bp	14 bp
Dollar Index	92.29	89.76	90.41	-2.0%	0.7%

The bottom line

The tariffs of March could mark the beginning of a pivotal shift in cross border trade that in turn would have effects across a wide range of domestic industries. And it's not so much their initial effects, whether primary or secondary, but the risk that the metal tariffs are only the tip of an oversized and fast approaching iceberg, at least that's the feeling one can get reading the news.