Market Summary
Global equity markets have come under notable pressure following a rapid escalation in trade tensions between the U.S. and China and less accommodative than anticipated commentary from the Federal Reserve at last Wednesday’s meeting. President Trump’s late week announcement of additional tariffs against China sparked a large movement out of risky assets like equities into safe havens like U.S. Treasury bonds. As a result, U.S. equities broadly posted their worst weekly losses on the year last week with the S&P 500 falling -3.1% and the Nasdaq dropping -3.9%. The risk-off sentiment has extended into this week’s early trading with the S&P 500 off another -3.0% on Monday following a significant depreciation of the Chinese yuan against the U.S. dollar, which has caused the U.S. Treasury Department to officially label China as a currency manipulator for the first time since 1994. The 10-year Treasury yield, which reflects economic growth and inflation expectations, has tumbled to 1.75% from about 2.08% just over a week ago.
The new round of tariffs announced Thursday will go into effect on September 1st of this year at an initial 10% level against approximately $300 billion of Chinese imports, primarily consumer goods, which had generally gone unscathed up to this point in the trade conflict. The tariffs, according to President Trump, were a result of a lack of follow through from China on prior commitments agreed to in negotiations like accelerating purchases of U.S. agricultural products.
In retaliation, China allowed the value of its currency to weaken beyond the exchange level of 7 yuan to U.S. dollar, a psychologically important level that hasn’t been breached in over a decade. The move has caused an outcry from U.S. officials, who are accusing China of weakening the yuan to make its exports cheaper and gain an unfair trade advantage that would hurt U.S. multinationals. However, China has announced that it will stem the pullback in the yuan as much further currency devaluation risks a flight of capital out of China from international investors. Furthermore, Beijing announced that it has suspended purchase of U.S. agricultural products.
Following the sharp escalation in trade tensions, many market participants are wondering if the Federal Reserve’s hand will be forced into further rate cuts than the 0.25% rate cut enacted at last week’s Federal Open Market Committee meeting. Although the rate cut marked a step towards easing financial conditions, some market participants were caught off guard by Jerome Powell’s characterization of the cut as a “mid-cycle adjustment”. This phrasing seemed to indicate this cut is not the beginning of a series of rate cuts, but instead, a one-time adjustment to account for troubled markets overseas. But a dimming growth outlook from rising trade uncertainty for U.S. companies could challenge that outlook.
Economic Highlights
Employment: Friday’s jobs report from the U.S. Bureau of Labor Statistics displayed a solid but slowing labor market with 164,000 nonfarm payrolls added in July, which was right in line with consensus expectations. Wage growth ticked up slightly more than expected, up 3.2% year-over-year, while the unemployment rate stayed stagnant at 3.7%.
Manufacturing: The July ISM manufacturing survey result fell short of expectations with a reading of 51.2 versus consensus of 52.0 and June’s 51.7 reading, but remained in expansion territory, albeit at a slowing rate of growth.
US Economy – The Week Ahead
Tuesday, 8/6/2019
- Job Openings & Labor Turnover Survey – Consensus: 7,325K (0% MoM), Prior Month: 7,323K (-0.7% MoM)
Wednesday, 8/7/2019
- Consumer Credit – Consensus: $16.2B (-5.3% MoM), Prior Month: $17.1B (-2.3% MoM)
Thursday, 8/8/2019
- Initial Jobless Claims – Consensus Estimate: 215,000 (0% WoW), Prior Week: 215,000 (3.9% WoW)
Friday, 8/9/2019
U.S. Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 1.6%, Prior Month: 1.7%
