In this situation of full employment (even broader measures of underemployment like U-6 are back to pre-crisis level), the Marxist dialectic proves to be right again: low unemployment tilts the balance of power in favor of employees, at least the most qualified and geographically mobile, over employers. It constitutes a strong incentive for the Federal Reserve to further tighten monetary policy, potentially at a faster path than expected by the market if ongoing protectionism drives inflation up, which would be ultimately negative for risky assets.
These red flag indicators should worry you…but there is hope
Though we are not facing a scenario of full-blown trade war yet, the US-China fight, along with quantitative tightening, are pushing investors away from markets that are less liquid and less integrated, meaning emerging and frontier markets. Since 2007, the fluctuations in Asian currencies have been a useful indicator of stress in the global economy. As a result of trade war noise, our basket of Asian currencies vs USD has decreased by 3.6% in Q2 2018 compared to Q1 2018. The magnitude of the drop is similar to that of Q3 2011 when the US lost its AAA credit rating but it is still lower than the impact of the CNY devaluation in 2015.