1. 10-Year Treasury Note Yield Highest Since 2011 – Spooks Markets
2. The New NAFTA – Global Trade Breakthrough or Just So-So?
3. More Challenging Trade Deals Ahead – China, Europe & Japan
Overview
Trump administration negotiators reached a major agreement with Canada on trade over the last weekend of September. The breakthrough, which came on the heels of an earlier deal with Mexico, vindicates President Trump’s tough approach to reforming trade and will mark a fundamental turning point for American jobs and global power.
The latest far-reaching trade agreement has a new name – goodbye NAFTA. The new deal will be known as the U.S.-Mexico-Canada Agreement (USMCA) and is much more than just a new name. Some hailed the USMCA as the greatest trade deal ever, while others complained that it’s just NAFTA 2.0. I’ll sort it out for you as we go along today.
Before we get to that, I have some analysis on what’s going on in the stock markets of late. Last week we saw the US equity markets soar to new all-time record highs, only to be followed by a severe selloff which saw the Dow Jones Industrial Average shed over 600 points at the low on Monday.
I believe this latest selloff in stocks is a reaction to the sharp rise in interest rates. The 10-year US Treasury Note yield has risen sharply since late August to a seven-year high of 3.25% on Friday and again today. A rise to this level, especially this quickly, has given stock investors a reason for concern. Here’s why.
10-Year Treasury Note Yield Highest Since 2011 – Spooks Markets
The Dow soared to a new record high above 26,950 during the trading session on Wednesday of last week, but then gave back almost all of that gain by the close. It then moved sharply lower on Thursday and Friday and has been higher and lower so far this week.
There’s plenty for the stock markets to worry about. The Fed raised short-term rates another 0.25% at its recent meeting to 2.0%-2.25% and is expected to raise the Fed Funds rate another 25 bps at the December meeting. Yet that’s not a big surprise.
What is a big surprise is that the 10-year Treasury Note futures yield has recently soared higher than just about anyone expected in such a short time. It reached 3.25% during the session on Friday and again earlier today, to the highest level since 2011. Notice below how fast it has risen in recent weeks.
The interest rate futures markets were priced for a further rise in short-term rates, but not this fast. Add that to the fact that last Friday’s jobs report was much stronger than expected. The Labor Department reported that the economy added 134,000 new jobs in September, and the unemployment rate fell to 3.7%, the lowest level in 49 years.
This suggested to many investors that the Fed will raise short-term rates even more than the markets have been expecting next year due to concerns that the economy may be overheating. Bond investors voiced concerns that inflation may become a problem in the near future, which would likely make the Fed even more aggressive in hiking rates.
It remains to be seen if this stock market pullback is just a normal dip or something more serious. A lot depends on what short-term interest rates do just ahead. In any event, keep in mind that October is historically the most volatile month of the year in the financial markets.
Keep those seatbelts fastened!
The New NAFTA – Global Trade Breakthrough or Just So-So?
Let me say upfront that I believe the new NAFTA is a good deal. Could it have been better? Sure. All trade agreements could be better. The real question is: Is the new NAFTA better than the old NAFTA? I say YES.
The new U.S.-Mexico-Canada Agreement (USMCA), which replaces the North American Free Trade Agreement (NAFTA), is much more than just a new name. Some of its breakthroughs include:
- Aiding US farmers by curbing Canada’s high tariffs and low quotas on American dairy products. This is a big deal for US farmers and a surprise accomplishment for President Trump.
- Reinvigorating US car manufacturing. Previously 40% of a car could be made in China or other countries with few labor or environmental standards and still considered to be “North American” and imported cheaply into the USA. The agreement drops this foreign portion to 25%. Another big deal.
- Both Canada and Mexico agreed to respect US patents on biologic drugs – the most promising field for new cures – for a period of 10 years, which is yet another big deal.
- Stronger provisions to protect US digital services and intellectual property.
NAFTA was perhaps the most unpopular trade agreement in US history. A poll earlier this year showed a plurality of Americans wanted to leave the agreement and only one in three thought it was beneficial. That’s why self-described “free traders” who have complained incessantly about Trump’s use of tariffs and other aggressive tactics should give him some credit.
Trump has taken a pact that facilitated crony trade and replaced it with one that is durable and preserves liberalized trade in North America. It also serves as a new standard for trade agreements with other counties, especially its provisions to protect US digital services and intellectual property – a big part of the future economy.
The new deal also shows that Trump will put aside political differences when it comes to protecting American jobs and profitability. As an example, the National Football League (NFL), which Trump has criticized repeatedly for its players’ displays of disrespect to the American flag, won big. The new agreement ends a practice by which Canada required NFL broadcasters to show the same commercials in Canada that they do in the USA, precluding a major source of advertising revenue for the league.
Under the new agreement, Mexico and Canada get assurances that Trump won’t pound them with auto tariffs. Trump has repeatedly threatened to slap hefty tariffs on car and vehicle parts coming into the United States. But along with the new trade deal, his administration signed “side letters” allowing the two nations to mostly dodge Trump’s auto tariffs.
USMCA also ends the practice in the Canadian province of British Columbia of elevating the price of American wine imports, which will particularly help liberal wine-growers in northern California. By winning this particular battle, Trump proved he represents all Americans, not just his political supporters.
There are other wins for the US in the new trade deal. You can read about them in the first link in SPECIAL ARTICLES below. In conclusion, I believe the USMCA is a good deal for America. Is it perfect? No. Is it better than NAFTA? Yes.
More Challenging Trade Deals Ahead – China, Europe & Japan
There are still other big trade fights on the horizon. The Trump administration is also seeking major changes to trade relationships with China, the European Union (EU) and Japan. This new North American deal comes on the heels of a recent trade agreement with South Korea.
Trade talks with Japan, with which the US has a long-running trade deficit, recently were transformed from unserious to serious. Japanese Prime Minister Shinzo Abe just agreed to a formal process that should lead to a new agreement in the months ahead.
China will be much tougher, especially since it benefits from a massive $376 billion trade deficit with the US. The communist government there has built an economy that depends on stealing intellectual property from America and other advanced economies. It also manipulates its currency and has high tariffs, including one that is 10 times the US rate on autos. It may take years to get China to change, but having the USMCA in place should help.
Europe is also dragging its feet on trade reform, despite signaling a willingness to agree to fundamental reform earlier this year. We pay for most of Europe’s defense and it rewards us with a 10% tariff on US cars (compared to our 2.5% tariff on theirs) and impenetrable barriers to US agriculture, especially by France.
In summary, don’t expect Wall Street or the “free trade” crowd in Washington to give Trump credit for this breakthrough or accept his tough tactics, including the threat of tariffs. Yet in the case of the new NAFTA deal, it looks like those tough tactics worked as the president got most (not all) of what he wanted in the USMCA. This should be good for the US economy.
All the best,
Gary D. Halbert
Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.
© Halbert Wealth Management
© Halbert Wealth Management
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