by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of a potential new economic stimulus program that could potentially boost growth and stock prices in China. We next review several other international and US developments with the potential to affect the financial markets today, including signs that Germany’s new fiscal policies are boosting business optimism in that country and the latest developments on US tariff policies.

China: To spur stronger consumer demand and faster economic growth, Chinese officials are reportedly considering a multi-billion dollar program to subsidize purchases of services such as travel, tourism, and sports. The program would apparently supplement the government’s existing consumer subsidy program, which aims to spur purchases of merchandise such as autos and appliances. Even if implemented, however, the temporary program may do little to reverse the big structural headwinds holding back China’s economy and financial markets.

Australia: Ahead of elections that must be held by May, the ruling Labor Party government has proposed a budget for the upcoming fiscal year that would cut taxes for the working class and hike spending on energy subsidies, healthcare, education, and defense. The measures are expected to produce a budget deficit equivalent to about $17.4 billion after two straight years of surpluses due to high commodity prices. In response, Australian stock prices and the Australian dollar have both appreciated modestly so far today.

Germany: The IFO Institute today said its March Business Climate Index rose to a seasonally adjusted 86.7, modestly beating the expected reading but up comfortably from the February index of 85.3. The index remains historically weak, reflecting Germany’s recent economic headwinds and slow growth, but the upturn may suggest that the government’s new fiscal stimulus policies are being well received by companies.

Israel-Hamas: The Israeli Defense Forces’ new chief of staff has reportedly developed a plan to reconquer the Gaza Strip and establish a long-term occupation to finally root out the Hamas militants that currently govern the territory. If approved by the government’s cabinet, the plan would likely be supported by the Trump administration, but it would also likely generate further criticism of Israel by many countries and weigh on the Israeli economy and financial markets.

United States-Denmark-Greenland: Second Lady Usha Vance, National Security Advisor Waltz, and other top officials from the Trump administration have announced that they will be in Greenland later this week, in part on an ostensibly private visit to attend a dogsledding competition and see the sights. Given President Trump’s threats to take over Greenland, Danish Prime Minister Fredericksen and the Greenland government have rejected any characterization of the trip as “private” and instead called it out as a provocation.

• Besides signaling Trump’s continued interest in acquiring Greenland, the trip may be designed to generate a positive response among the island’s residents.
• However, all Greenland political parties have rejected Trump’s call to acquire Greenland, and public opinion polls suggest about 85% of the island’s residents don’t want to become a part of the US. Press reports say residents are planning a protest at the dogsledding event to be attended by Vance and the US officials.

US National Security: President Trump today is facing a scandal after his national security officials included an editor from The Atlantic in a group chat planning last week’s airstrikes against Houthi rebels in Yemen. The most serious concern is that the officials were using the Signal commercial communication platform to discuss such sensitive planning, rather than the Defense Department’s secure encrypted systems.

• Although Signal is known for its strong encryption and has been endorsed by Elon Musk, it has also been subject to security bugs. The advanced encryption used by US national security and intelligence organizations is significantly stronger than Signal’s.
• It is not uncommon for new administrations to make such errors. After all, new administrators often come from the private sector where strict protocols are not necessary. Nevertheless, the use of Signal and the apparently inadvertent inclusion of the reporter in the group chat will add to concerns that administration officials may have a relatively casual approach to national security, especially if similar mistakes happen in the future.
• More broadly, poor communication security practices by the administration may add to concerns that allies may stop sharing sensitive intelligence information with the US out of fear that it could be exposed. Although the US intelligence agencies generate the bulk of the information vital to national security, foreign partners provide intelligence that can be critical to “filling in the gaps” of US knowledge.

US Tariff Policy: One day after reports indicated that President Trump may limit his April 2 “reciprocal” tariffs to only about 15 countries, he yesterday suggested that his sectoral tariffs on products such as automobiles and lumber may not come until sometime in the future. At the same time, he unexpectedly said he would impose an additional 25% tariff on any country that buys oil or gas from Venezuela.

• The Financial Times this morning also reports that officials in the administration are considering a two-step process where tariffs would be initially imposed using one legal authorization but later rely on a different law. The move would aim to make the tariffs more legally durable.
• Importantly, officials cited in the article said they were more focused on using the tariffs to generate revenues rather than to punish other countries for their US trade imbalances.
• In any case, as we’ve noted before, we think the administration’s erratic tariff announcements could keep asset prices volatile for the time being.

US Labor Market: The Office of Federal Contract Compliance Programs, which oversees the activity of firms doing business with the government, has said it will review the civil-rights plans submitted by those contractors prior to President Trump’s current term to determine whether they should be penalized for discriminatory employment practices. Given that the government has some 40,000 contractors, the move suggests the administration’s fight against diversity and equity programs in the private sector could now broaden dramatically.

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