Caterpillar’s stock took a beating Tuesday after the construction equipment maker reported that President Trump's tariffs are raising costs and eating into profit expectations.
The disappointing guidance from the industrial bellwether helped spark a broad morning sell-off, although the stock market made up most of the losses by the end of the day. Like the U.S. economy, Caterpillar’s fundamentals are strong — it posted record third-quarter profits, rising revenue in all its major markets and brisk demand for its wares.
But investors see storm clouds gathering, not least from the Trump administration’s import duties, which the company estimates will raise its material costs by at least $100 million in the second half of this year.
It’s a story starting to play out across the economy. Companies are reckoning with trade barriers the Trump administration appears to be in no hurry to lower as it eyes a longer-term showdown with China. A number of other firms reporting their third-quarter results are citing higher costs thanks to tariffs:
- United Technologies said it expects tariffs to cost it $200 million next year, double its earlier estimate;
- 3M said “tariff head winds” would raise its costs by $100 million next year;
- Honeywell reported that tariffs could jack up its costs by hundreds of millions of dollars;
- Ford said that metals duties have cost it $1 billion in profits;
- Honda pointed to “hundreds of millions of dollars” in new costs.
Bloomberg runs down the wider list here, noting that “so far, a review of corporate earnings results and conference-call transcripts suggests the number of large global companies harmed by higher tariffs is exponentially larger than those that are helped by them.” A number of others that produce in China are weighing whether to move their supply chains.
The Trump administration is signaling it won't budge on the steel and aluminum tariffs it imposed in June. Trump himself downplayed the impact of the duties in a Tuesday interview with the Wall Street Journal, telling the paper, “We don’t even have tariffs. I’m using tariffs to negotiate,” and describing the metals tariffs as “small.”
Asked about the risk the tariffs pose to the economy, Trump falsely said: ““Where do we have tariffs? We don’t have tariffs anywhere… You know what happens? A business that’s doing badly always likes to blame Trump and the tariffs, because it’s a good excuse for some incompetent guy that’s making $25 million a year.”
And the president is forgoing a symbolic signing ceremony for the revamped North American Free Trade Agreement over the issue, since Canadian officials have refused to participate without guarantees the United States drops the duties on its metals.
Meanwhile, the outlook is bleak for a negotiated peace between the Trump administration and its counterparts in Beijing. White House economic adviser Larry Kudlow confirmed Tuesday that Trump will meet with Chinese President Xi Jinping at the G-20 summit next month in Buenos Aires. But he immediately sought to play down hopes for a breakthrough there, saying a good outcome would constitute agreement “on some basic principles and trading rules.”
Expectations are similarly dim across the Pacific, Bloomberg reports. “Chinese officials -- who once hoped to buy their way out of a conflict via purchases of U.S. energy and agricultural exports -- are also now bracing for a prolonged fight and focusing on adapting to a ‘new normal’ in relations,” the news outlet writes. “In private, Chinese officials have started to talk less about a potential peace and more about ‘stabilizing’ the relationship with the U.S. to avoid escalation. Progressively tougher rhetoric out of Washington has helped feed the view that the Trump administration is embarking on a strategy to contain China and curtail its economic rise.”
Chris Krueger of Cowen Washington Research Group says the confrontation has tipped into a new Cold War. “There does not seem to be much middle ground here,” he wrote in a Tuesday research note. “The trade policy Pandora's Box has already been unlocked - it is now more of a question as to whether it is bolted or whether it will fully open.” Krueger writes that his firm expects the Trump administration to announce tariffs on an additional $267 billion in Chinese imports shortly after the midterms and implemented early next year.
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— Trump blasts Powell, again. WSJ's Michael Bender and co.: "In an interview Tuesday with The Wall Street Journal, Mr. Trump acknowledged the independence the Fed has long enjoyed in setting economic policy, while also making clear he was intentionally sending a direct message to Mr. Powell that he wanted lower interest rates. 'Every time we do something great, he raises the interest rates,' Mr. Trump said, adding that Mr. Powell 'almost looks like he’s happy raising interest rates.' ... Mr. Trump said it was 'too early to say, but maybe' he regrets nominating Mr. Powell...
"Asked why he thought Mr. Powell was raising rates, Mr. Trump paused, then said, 'He was supposed to be a low-interest-rate guy. It’s turned out that he’s not.' Mr. Trump demurred when asked under what circumstances he’d remove Mr. Powell, who he selected for a four-year term that started in February. 'I don’t know,' he said. 'I’m just saying this: I’m very unhappy with the Fed because Obama had zero interest rates.' He said the Fed was supposed to be independent 'in theory,' but said his instinct was that interest rates are being raised too quickly."
FLASHBACK: Volcker had his own troubles with then-President Reagan. The former Fed chair recounts an awkward meeting at the White House in the summer of 1984 in his new book, "Keeping at It: The Quest for Sound Money and Good Government," excerpted in the new issue of Bloomberg Businessweek: "I was summoned to a meeting with President Reagan at the White House. Strangely, it didn’t take place in the Oval Office, but in the more informal library. As I arrived, the president, sitting there with Chief of Staff Jim Baker, seemed a bit uncomfortable. He didn’t say a word. Instead, Baker delivered a message: 'The president is ordering you not to raise interest rates before the election.'
"I was stunned. Not only was the president clearly overstepping his authority by giving an order to the Fed, but also it was disconcerting because I wasn’t planning tighter monetary policy at the time. In the aftermath of Continental Illinois’s collapse, market interest rates had risen and I thought the Federal Open Market Committee might need to calm the market by easing a bit. What to say? What to do? I walked out without saying a word."
— Foreigners retreat from Treasurys. The Wall Street Journal's Daniel Kruger and Ira Iosebashvili: “Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of 2018. That is just over half of what they bought during the same period last year and accounts for a much smaller share of Treasury issuance, as the government steps up the size of regular bond auctions to fill a growing U.S. budget gap.
"Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013, according to U.S. Treasury data. So far, U.S. yields remain low historically, debt funding remains broadly available and many foreign purchasers retain large stakes. . . . Yet it is clear that the foreign pullback has helped fuel a bond selloff this fall, which has driven the 10-year yield to a recent 3.15% and has shaken the nine-year-long rally in U.S. stocks, and that continuing reductions in foreign appetite could further unsettle financial markets.”
Main Street is buying the dip. Wall Street isn't. Bloomberg's Lu Wang and Vildana Hajric: " The rift between Wall Street and Main Street is getting wider when it comes to stock investing. For the third week in a row, individual investors bought stocks while institutional and hedge funds were net sellers, data on client flows compiled by Bank of America showed... While a reflection of only one firm’s clients, the data is the latest to show the divided sentiment that has gripped the market in recent months. To some, the latest selloff is another dip that’s worth buying with earnings growth running at 20 percent and valuations falling. The others see a congregation of forces that threatens to slow the 9 1/2-year bull market: higher bond yields, slowing profit growth, and persistent political tensions at home and abroad."
Small caps drop. Bloomberg's Sarah Ponczek and Sid Verma: “The so-called America First trade has unwound, with small-cap stocks erasing gains for the year after entering a correction. Long considered the primary beneficiaries of [Trump’s] pledge to favor U.S. businesses, small caps have fallen hardest since summer. The Russell 2000 has dropped more than 13 percent from its peak in late August — beyond the 10 percent threshold that defines a correction — erasing all its gains for the year. The gauge’s relative outperformance versus the megacaps of the S&P 500 Index since the 2016 presidential election is now just a memory.”
— WTO confronts existential crisis. Reuters's Tom Miles: "The World Trade Organization is scrambling to develop a plan for the biggest reform in its 23-year history after [Trump] brought the world’s top trade court to the brink of collapse by blocking appointments of its judges and threatening to pull the United States out of the organization. Trump’s administration has targeted the WTO, the watchdog of global commerce, as part of his wider campaign against trade arrangements he contends have cost hundreds of thousands of U.S. jobs.
"Proposals to shore up the organization include increasing the number of judges and rewriting trade rules for industrial subsidies, state-owned firms and technology transfer. Those ideas and others will be discussed when Canada hosts a dozen trade ministers in Ottawa on Wednesday and Thursday."
— Chinese-owned company eligible for Trump's farm bailout. The Washington Post's Jeff Stein: “A Chinese-owned pork producer is eligible for federal payments under [Trump’s] $12 billion farm bailout, a program established to help U.S. farmers hurt by Trump’s trade war with China. . . . JBS, a subsidiary of a Brazilian company by the same name, is also eligible to apply for the federal money. The two companies are the biggest pork producers in the United States, according to the National Pork Board, a quasi-government agency... The possibility of money flowing to foreign-owned firms underscores the difficulty of trying to craft government programs that benefit only domestic firms.”
SAUDI ARABIA FALLOUT:
— Trump says Saudis engaged in "worst coverup ever," imposes penalties. The Post's Kareem Fahim, Tamer El-Ghobashy, John Hudson and Chico Harlan: "Trump said Tuesday that Saudi officials had engaged in the 'worst coverup ever' after the killing of journalist Jamal Khashoggi earlier this month, as the administration took its first concrete step to penalize Saudi Arabia, revoking visas for its agents implicated in the killing. That initial penalty was modest, since 18 of the 21 Saudi suspects were already under arrest, and Trump said he would 'leave it up to Congress' to determine how best to punish the kingdom for the killing inside its Istanbul consulate."
— U.S. firms still show up for Riyadh conference. The Post's Kevin Sullivan: "Gathered under grand domes and crystal chandeliers for a glitzy investment forum nicknamed 'Davos in the Desert,' business leaders on Tuesday called the death of Saudi journalist Jamal Khashoggi terrible and sad but said it shouldn’t derail their dealmaking or U.S.-Saudi relations... A U.S. executive who advises sovereign wealth funds said that although the Khashoggi case was 'shocking,' ultimately it would be only a 'hiccup' in the business world. 'You support your friends in good times and bad,' the executive said. 'The trajectory [in Saudi Arabia] is toward more openness and transparency, but there are going to be bumps in the road.' He, like others, spoke on the condition of anonymity because of the sensitivity of the subject."
The NYT's Alan Rappeport reports that bankers "kept their name tags obscured behind ties," though "those hoping to escape any tarnish from attending Saudi Arabia’s global investment conference... were foiled when the crown prince himself, Mohammed bin Salman, appeared at the summit meeting and received a standing ovation."
Henry Biner, an executive at the Boston-based P/E Investments, spelled out the calculus. He called Khashoggi's killing "horrendous" but said there were wars and atrocities across the region. Per the Times, he said, “One year from now, somebody is going to ask where the revenue is... We’re not going to put our relationships on the line for this.”
— Some in Silicon Valley call for cutting Saudi ties. The Post's Jeanne Whalen and Elizabeth Dwoskin: "A few prominent voices in Silicon Valley are calling for the tech world to exercise greater caution in vetting its investors as disquiet builds about one of the industry’s biggest backers -- Saudi Arabia... The calls, while still isolated, are challenging the hush-hush world of money-raising in the startup industry, where venture-capital firms and privately owned startups disclose little about their funding and operations. 'It is time for all of us in the startup and VC sector to do a deep dive on our investor base,' Fred Wilson, the influential founder of Union Square Ventures, a New York City-based venture capital firm with strong ties to the Valley, argued in a blog post Sunday. 'Who are our investors and can we be proud of them?'"
— Most Americans say they haven't benefited under Trump. Bloomberg's Riley Griffin: "A majority of Americans reports that their financial situation has not improved since the 2016 presidential election, despite low unemployment and a booming stock market. More than six in 10 Americans said that they’re no better-off financially than they were two years ago, according to a Bankrate.com report released Wednesday. Low earners, women and those of retirement age were most likely to report that they are no wealthier than before... A whopping 78 percent of Americans earning less than $30,000 a year report that their financial situation has not improved over the last two years, while 27 percent said their financial situation has actually worsened."
Yet unbanked Americans at record low. The Associated Press's Ken Sweet: “The number of Americans who do not have a bank account fell to a record low last year, the Federal Deposit Insurance Corp. said Tuesday, a sign that the economic fortunes of the country’s most vulnerable people continues to improve. In 2017 approximately 6.5 percent of U.S. households were unbanked, defined as not having a primary bank account. That is down from 7 percent in 2015 and from a high of 8.2 percent in 2011. That translates into roughly 14.1 million adults who do not have a bank account . . . The reasons for not having a bank account remained steady from previous surveys, with ‘not having enough money’ being the No. 1 reason for doing so. Not trusting banks was another popular reason for not being banked.”
— Blue-collar jobs overwhelmingly held by men. The Post's Danielle Paquette: “Well-paying jobs that don’t require a college degree are multiplying at the fastest rate in three decades, offering more Americans a path to the middle class. But economists warn one group is missing out: women. A new report from Georgetown University found there are now about 13 million jobs nationwide that require only a high school diploma and pay at least $35,000 annually, a higher wage than most entry-level service roles. Three-quarters of them, however, belong to men. ‘If you don’t have that degree, you better be a guy,’ said Nicole Smith, chief economist at the Georgetown University Center on Education and the Workforce. . . . Analysts say blue-collar jobs, even with increasing perks, have an image problem — society still doesn’t expect to see a woman wielding a jackhammer — and women who try to break into the industries face discrimination from bosses and colleagues.”
— Key critic turns bullish on Tesla. Reuters's Jennifer Ablan and Munsif Vengattil: “Tesla Inc shares jumped more than 9 percent on Tuesday after long-time critic and short-seller Citron Research said it had a change of heart and is now betting the electric automaker’s stock will rise. The firm said in a research note that Tesla’s Model 3 sedan is a ‘proven hit’ and serious competition from other automakers for the plug-in car market has not materialized, marking a sharp reversal from its previous stance.”
But the AP notes of 15 analysts who cover the company, not one expects it to post a third-quarter profit.
— GOP follows Trump's lead on taxes. WSJ's Richard Rubin: "Republicans are attempting to turn a vague tax-cut promise floated by [Trump] into a campaign plank as they try to hang onto their majority in the House of Representatives. Days after Mr. Trump suggested an imminent middle-class tax cut that Congress doesn’t have the votes or time to pass this year, the top tax lawmaker in the House said he is working on it, and tied any action to future GOP control of Congress. 'We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10% tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate,' said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee."
Reverse-engineering a plan. The Post's Ashley Parker and Phil Rucker report that the pitch "began not as a factual proposal, but as a false promise. When [Trump] abruptly told reporters over the weekend that middle-income Americans would receive a 10 percent tax cut before the midterm elections, neither officials on Capitol Hill nor in his administration knew anything about such a tax cut. The White House released no substantive information...
"Yet Washington’s bureaucratic machinery whirred into action nonetheless — working to produce a policy that could be seen as supporting Trump’s whim. One such option now under discussion by administration officials is a symbolic nonbinding 'resolution' designed to signal to voters ahead of the elections that if Republicans hold their congressional majorities they might pass a future 10 percent tax cut for the middle class."
From The Post's Erica Werner:
Telling response from CEA Chairman Kevin Hassett on Trump's new tax idea--> pic.twitter.com/CxbILDCwcu— Erica Werner (@ericawerner) October 23, 2018
— SEC opens Goldman probe. NYT's Emily Flitter: "The Securities and Exchange Commission has opened an inquiry into the departure of a senior investment banker and Goldman Sachs partner who raised concerns about what he viewed as unethical conduct at the bank, according to people briefed on the inquiry. The partner, James C. Katzman, called Goldman’s whistle-blower hotline in 2014 to complain about a number of practices inside the Wall Street investment bank... David M. Solomon, who is now Goldman’s chief executive, urged Mr. Katzman to move past his complaints, and he left the firm in 2015. Among the grievances that Mr. Katzman voiced to Goldman officials were that his colleagues had sought to obtain confidential client information and that the bank inappropriately tried to hire a customer’s child."
— Capital One slapped with $100 million penalty. American Banker's Hannah Lang: "The Office of the Comptroller of the Currency announced Tuesday that it has levied a $100 million civil money penalty against Capital One for deficiencies in its anti-money-laundering program. The penalty stems from a consent order the agency filed against Capital One in 2015, charging that the bank had failed to adopt and implement a compliance program that met anti-money-laundering and Bank Secrecy Act program requirements due to an “inadequate system of internal controls and ineffective testing,” according to the agency's consent order."
- Federal Reserve Vice Chair Richard Clarida delivers a speech on the economy and monetary policy at the Peterson Institute for International Economics in Washington tomorrow.
- The American Enterprise Institute holds a presentation of the book “Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi” by James Freeman and Vern McKinley in Washington tomorrow.
— From The Post's Tom Toles: “Trump is a tax on people who aren’t paying close attention.”