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U.S.-China Tariff War Resurfaces

Zacks Equity Research

We see an eventful Friday in the markets today, with the most hotly anticipated U.S.-based IPO in 7 years, new economic data, and — oh yeah — a new stage to the U.S.-China trade war about to take effect. Pre-market futures are down again this morning, and look to close down pretty significantly for the week.

Starting with the trade war, as of 12:01 this morning, the U.S. has slapped a 25% tariff on $200 billion in goods shipped from China to the U.S. These goods had already been targeted last fall when this trade war began, at a tariff rate of 10%. These goods are largely within the Consumer Discretionary and Consumer Staples sectors — everyday household products that China produces much cheaper and in much higher volume than manufacturers in the U.S. do.

President Trump estimates $100 billion in proceeds will be the windfall gain for the U.S. here, which he then said he plans to funnel to U.S. farmers likely to be targeted by any Chinese retaliation. However, Trump also incorrectly stated China will be paying these 25% tariffs; they will in fact be paid by U.S. purchasers of Chinese goods, and the costs will be passed onto the American consumer.

Analysts project this next stage would negatively affect China worse than it would the U.S., even with retaliation, for the simple fact that China exports far more goods to the U.S. than vice-versa. Yet others point out that structurally our two countries are set up far differently — pain endured in the U.S. may cause trouble for Trump during next year’s general election, whereas China’s President Xi Jinping holds his post for life.

Based on this, some say China plans to wait out the Trump administration’s strong-arm tactics, and that a new administration a year and a half from now might present a more favorable negotiation on how to price Chinese exports. Yet the strategy may also change the entire manner of how new talks might manifest themselves: should a new U.S. executive government decide to partner with Allies rather than alienate them, it may present a better opportunity to squeeze China from more sides.

New Consumer Price Index (CPI) data for April has hit the tape this morning as well, with results slightly lower than estimated, much as yesterday’s Producer Price Index (PPI) results were. A headline read of +0.3% was 10 basis points lower than both consensus and March’s headline number. Ex-food & energy, this number drops to +0.1%, also a tenth light.

Year over year CPI reached 2.0%, with core only slightly hotter at 2.1%. Real average hourly earnings rose 1.2%, weekly up 1.9%. These figures point to a still-growing economy, but at slightly cooler rates than predicted. Especially in terms of wage gains, we can look back at the impressive Q1 GDP headline of 3.2% and see much of that was in business investment, not higher pay for the workforce.

Uber’s UBER long-awaited IPO finally arrives today to the NYSE, at an opening price of $45 per share. This puts the company at a market cap north of $75 billion, naturally with the opportunity to go higher. Investments from outside companies include PayPal PYPL, SoftBank and Toyota TM, among others. It is the most anticipated market entry since Facebook FB in May of 2012.

With Uber Eats and plans for an Uber Freight business, Uber is positioning itself to be more than just a “ride-sharing” company. In fact, Uber is a technology firm — essentially the architect of a dispatching app. Revenues in 2018 grew 43% to $11.3 billion, so expectations are high from certain investors that the stock could perform very well.

However, ride-share competitor Lyft LYFT went public 6 weeks ago, and results since have not been good. The company finished its first day of trading up near $80 per share, but has since wallowed in mid-$50s territory. Considering Uber is not expected to be profitable for at least the next several quarters, the company’s IPO does come with a few notes of caution.

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