Money Advice

U.S. and China declare trade war truce, higher interest rates and oil prices the new concern

Posted by The Simply Money Advisors Team on May 21, 2018 10:10:00 AM

The U.S. and China have declared a truce on the trade war that has been troubling Wall Street. Over the weekend, Treasury Secretary Steven Mnuchin said, “We are putting the trade war on hold. Right now, we have agreed to put the tariffs on hold...”

A sticking point for the U.S. is reducing the trade deficit. In 2017, our trade deficit with China was $350.7 billion, as we bought $505.6 billion worth of goods from China, but China only bought $154.9 billion from the U.S. The Trump administration has been seeking a reduction of the trade deficit by $200 billion.

While this may be hard to achieve, China appears to be open to importing more energy and agricultural commodities from us. These trade negotiations are promising, but there has been no progress on China’s alleged technology theft from U.S. companies.

Meanwhile, NAFTA (North American Free Trade Agreement) trade talks haven't resulted in a deal. If an agreement can be reached in two weeks, the current Congress would be able to approve it this year. Both Canada and Mexico indicated a deal is possible, but talks are stalling on auto manufacturing. The U.S. wants a greater portion of cars to be built in the U.S.

Wall Street is also wondering what higher interest rates and higher oil prices mean for the economy. Rates on the 10-year government bond hit its highest level since 2011. Rates on traditional bank loans and credit cards are tied to government bond rates, meaning it’s now more expensive to buy items on credit than it has been in a few years.

Keep in mind, though, that interest rates are still low. The current rate on the 10-year government bond is lower than at any point during the 40-year period of 1962 to 2002. Also, remember that interest rates at higher levels have often led to higher stock prices.

Because of traditional supply and demand, oil has also been on the rise this year. Global inventories have dropped due to agreed production cuts from many of the larger oil producing nations, and demand for oil has been steady thanks to stable global growth.

With more U.S. oil supply likely coming back, oil prices should stabilize in the near future. In the meantime, though, higher oil means you’ll be spending more at gas stations. Currently, the average price for a gallon of regular in Cincinnati is $2.93, about 50 cents higher than a year ago.

The Simply Money Point

Higher interest rates and oil prices will offset some of the benefits of tax reform. But consumer spending should still be strong enough for the U.S. economy to grow around a healthy 3% this year, which is great news for investors like you. 

Topics: Economics

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