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A 'potentially lethal combination' between hot jobs market and trade tensions could unleash inflation, Stephen Roach warns 

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The US-China trade war could unleash an inflation surge, China expert Stephen Roach warns

There's a growing risk that trade tensions between the world's two largest economies may converge with other factors to disrupt the global economy — and knock the historic U.S. stock market rally off its stride, according to one of the world's leading authorities on Asia.

Yale University senior fellow Stephen Roach is worried the US-China trade war is putting sand in the gears of global supply chains, which has been playing a vital force in keeping price pressures in check. Roach referred to the threat as 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 warned Friday on CNBC's "Trading Nation."

He added: "For every point of slack in advanced economies, the value chains hold down overall inflation by about 9/10s of a point."

Roach, who served as Morgan Stanley Asia chairman for five years, believes Wall Street and policy makers are largely underestimating the impact of the trade tensions. Despite the new deal to replace the North America Free Trade Agreement, Roach isn't optimistic the U.S. is any closer to a resolution with China.

"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."

His thoughts came as the 10-Year Treasury Note yield traded at levels not seen in seven years and on the heels of a strong monthly employment report. The Labor Department's September numbers showed unemployment hit 3.7 percent — the lowest level since 1969.

"The world economy could really start to unwind and do so rather quickly," said Roach. "This is no time for complacency."

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Inflation threat baked into trade war is pushing stocks into a danger zone, Yale’s Stephen Roach warns
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Key Points
  • Amid an ongoing tariff battle with its global partners, the U.S. saw its trade deficit continue to widen.
  • The imbalance increased $3.2 billion in August to $53.2 billion, a 6.4 percent increase and part of an ongoing trend in 2018, according to the Bureau of Labor Statistics and the U.S. Census.
  • One particular contributor to the August imbalance was soybeans, a hotly contested point of the trade war. Soybean exports fell $1 billion for the month.