New Trade Deal – Big Fanfare, Small Gains

Last Sunday, Canada joined the United States and Mexico in renegotiated North American Free Trade Agreement (NAFTA). The new deal, dubbed the U.S.-Mexico-Canada Agreement (USMCA), maintains much of the old NAFTA with some new provisions that the Trump administration had been advocating for, including greater protections for North American autoworkers, drug manufacturers, and digital property rights.

For U.S. dairy farmers, the deal was touted as big win, as Canada has agreed to open their markets to U.S. dairy products, but once the details were revealed, the glass was half empty for U.S. milk and cheese producers. Canada will allow U.S. dairy to enter Canada tax-free, but will cap tax-free imports to 3.6% of the Canadian market. Even after some other trade adjustments, the deal is likely to equal “less than 2% of total U.S. sales,” according to the Wisconsin Farmers Union.

U.S. milk futures rallied briefly on the news, but ultimately finished the week moderately lower, a sign of the lukewarm reaction to the deal.

Meanwhile, U.S. grain and livestock producers were happy to see that they will continue to enjoy tariff-free exports of grains and meat to Mexico and Canada. This sweetheart deal had been threatened over the last year, but now appears to be solidly in place, allowing U.S. farm products to flow tax-free across the border. During the week, markets rallied, with corn, soybeans, cattle, and hogs all reaching the highest level in at least a month.

Interest Rates Booming

Interest rates are on the rise, with some measures reaching the highest level in almost a decade.

The Federal Reserve raised interest rates by 0.25% last week, the third time this year. The Fed is expected to raise rates one more time this year, and more in the future, as Jerome Powell, the Federal Reserve Chair, has stated that rates are “a long way from neutral.” These expectations sent futures markets into a tizzy, raising expectations for interest rates on government bonds, mortgages, auto loans, and even savings accounts.

This created concerns for current owners of bonds, as the rates they receive will feel low compared to future high rates, which caused investors to dump existing government bonds and notes, pushing their value to multiyear lows. Meanwhile, stock markets tumbled from all-time highs this week as traders grew concerned about the impact of high interest rates on companies’ borrowing costs in the future.