Slippery Road Ahead

Slippery road ahead.  Stocks ended yesterday’s session in the green as investors Googled the term “rare earth element”.  It was a light news day for the trade war giving stocks a chance to climb after two days of falling.

MY TWO CENTS

1.  Tariffs are the new diplomacy. WHILE YOU SLEPT, President Trump tweeted his intention to slap a 5% tariff on $346 Billion in Mexican imports to the US.  The tariff is being levied to pressure Mexico into curbing illegal immigration into the US.  The taxes will commence on June 10th and rise to 25% by October 1st.  The new tariffs come at a time when the USMCA (the new NAFTA) is in the process of being completed and will have a very direct impact on south of the border producers of not only produce but automobile parts.  Guacamole is fast becoming a luxury!  It is no joking matter as the price of the popular fruit (trust me, I looked it up on Wikipedia) has more than doubled since March as the border battle heated up and the newly minted tariff will only exacerbate the situation.

2.  Trouble in and from China. WHILE YOU SLEPT, Chinese State radio reported that the government is establishing a list of “unreliable entities” who cut supplies to Chinese companies.  Those entities are, of course, companies which recently began to comply with the President’s executive order.  The broadcast went on to confirm that the Chinese authorities are preparing a plan to curb exports of rare earth minerals.  Meanwhile the Chinese economy continues to show some warning signs as Factory PMI fell to 49.4 from 50.1, missing expectations.  Employment in the non-manufacturing PMI fell to its lowest level in over three years.

THE MARKETS

Equities ended the day slightly higher after slipping into the red briefly, giving traders a chance to consider end of month positioning.  It was a long, short week for traders who were bombarded with a step up in trade wrangling, increased recession fears, and new geo-political risks to consider.  The S&P500 closed up by +0.21%, the Dow Jones Industrial Average climbed by +0.17%, the Russel 2000 slipped by -0.30%, and the NASDAQ 100 advanced by +0.40%.  Bonds climbed for a third straight session and 10 year yields fell by -5 basis points to 2.21%.  The 3-month / 10-year yield curve closed out its 6th straight session inverted at -15 basis points.  The market is now pricing in an 85% chance of a rate cut by December with the highest probability pointing to two cuts.  This despite the fact that Fed governors have resoundingly shown reticence to cutting… at least for now.

WHAT’S NXT

- The Fed’s favorite gauge of inflation, The Personal Consumption Spending Deflator (PCE), is due out this morning and is expected to come in at a year over year growth of +1.6%, up slightly from last month’s read of +1.5%.  Recall that the Fed’s inflation target is +2.0%.

- Personal Income is expected to have risen by +0.3% month over month compared to last month’s growth of +0.1%.

- University of Michigan’s final sentiment read for May is expected to come in at 101.5 compared to the last read of 102.4.

- Atlanta Fed Chief Raphael Bostic and New York Fed President John Williams will both speak at different events.

- Next week will be packed with economic releases including Manufacturing PMI, Factory Orders, Durable Goods Orders, Fed Beige Book, and the always-exciting Monthly Employment Situation.

Have a great weekend!

daily chartbook 2019-05-31