Investment guru Stephen Roach warns that the U.S.-China trade squabble could combine with other economic factors to halt the seemingly endless bull-run stock market and spark an inflation spike.
The Yale University senior fellow told CNBC that the threat is one of the "more destructive" layers of the trade war for stocks.
"You've got potentially a lethal combination between a hot labor market in an unwinding of the supply chain effects on the global front which could give you a surprising surge in inflation that the Fed is not positioned to really address with its still very, very low federal funds rate," he told CNBC.
Washington last month slapped tariffs on $200 billion worth of Chinese goods, with Beijing retaliating with duties on $60 billion worth of U.S. products. The United States and China had already imposed tariffs on $50 billion worth of each other’s goods.
At the same time, the Trump administration’s “America First” policies, which have left the United States embroiled in a bitter trade war with China and tit-for-tat tariffs with other trade partners, have raised the cost of some raw materials, Reuters explained.
"For every point of slack in advanced economies, the value chains hold down overall inflation by about 9/10s of a point," said Roach, who served as Morgan Stanley Asia chairman for five years.
"The whole hope from the Trump administration is that China will be quickly beaten into submission as they did with supposedly Mexico and Canada," said Roach. "The odds of a long disruption are high," he said.
"The world economy could really start to unwind and do so rather quickly," said Roach. "This is no time for complacency."
However, a flood of economic data and developments last week pointed to a historically rosy and extended period of super-low unemployment, modest inflation and steady growth, Reuters explained.
For a solid decade after the collapse of Lehman Brothers touched off a global financial crisis, there was good reason to think the U.S. economy remained broken, from skepticism about the health of the labor market to tepid economic growth and the moribund rate of interest paid on U.S. Treasury bonds.
In a heartbeat, that seemed to change last week in a series of events and reports.
Amazon.com Inc’s (AMZN.O) move to a $15 minimum wage, possibly setting the bar for companies nationwide. It came through a jump in long-term bond yields that signaled faith the gears of growth will remain engaged for a record-long recovery.
On Friday, it came through the 3.7 percent unemployment rate, a 49-year low, continuing a run of employment growth that many analysts, including at the Fed, have long expected to slow.
“Wage inflation is creeping higher,” said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.
“There’s no question the job market in the United States is possibly at its best in a generation. There’s no question or debate about that. The jobs report has become a inflation report.”
Treasury bond yields rose further on the payrolls report, with the benchmark 10-year note yield touching its highest level since 2011, and U.S. stocks slipped.
The week’s events were not just consistent with the good times scenario both Powell and U.S. President Donald Trump have laid out. They validated it, and in doing so pointed to a U.S. economy that may be starting to work more like it used to. ac
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