Trade tirade! Markets, basking in the warmth of Wednesday’s interest rate cut, got the rug pulled out from under them with a new threat of tariffs on China. Stocks spent the first half of yesterday’s session in the black until Trump’s surprise tariff tweet sent them into a tailspin pushing indexes into the red.
MY TWO CENTS
- Targeting the consumer. My regular readers are well aware of my keen focus on the US consumer, which has largely kept the economy and the stock market moving forward late in this economic cycle. I suppose now would be a good time to repeat my oft-written trope that the consumer makes up 2/3 of the US GDP. For good or bad, as long as individuals continue to buy shoes, clothes, cellphones, TV’s, etc., the economy will continue to grow and propel equity markets upwards. Consumer sentiment is a big factor, and thankfully, it remains solid, as evidenced by the Conference Board’s report earlier this week. But THE biggest factor in purchase decisions is still price. Economic law, not theory, states that as prices go up, consumers purchase less. Yesterday afternoon President Trump announced, via Twitter, that he will be imposing a 10% tariff on an additional $300 billion worth of Chinese imports. The key word in that was “additional”, because of the goods impacted by the new tariff on the so-called “list 4”, which is principally made up of consumer goods including clothing, shoes, and mobile phones. Essentially, the list 4tariffs will directly affect the consumer, while prior lists were largely targeted at industrial-type products. Will it have an impact on the US economy? According to Rick Helfbein, CEO of the American Footwear and Apparel Association, 69% of footwear and 42% of apparel sold in the US is produced in China. As we enter back to school season, US companies will be faced with a tough decision on wether to pass the price hikes onto consumers or suffer losses in profitability. Either way, the economy will suffer.
- A hawkishrate cut. Seems like an oxymoron as rate cuts are often associated with dovish monetary policy, but this last rate cut was quite different as it came with some catches. By catches, I am referring to the Chairman’s statements and press conference which made it quite clear that at least this rate cut was an adjustment and not the beginning of a major policy shift. It is clear that the Fed is concerned with the global economy while appearing to be less concerned with the US economy. This is precisely why markets sold off on Wednesday. Yesterday morning's release of a weaker than expected ISM Manufacturing number caused stocks to rally by adding hope that further rate cuts would have to come in response to the slowing economy. It was bad is goodtrade. The bad news that came with Trump’s latest tariff Tweet was not quite treated with the same warm welcome by stocks. Bonds, on the other hand, responded in a resounding rally because if the new tariffs actually hit, it all but ensures that the Fed will have to cut rates further in the future.
THE MARKETS
Stocks were socked in the eye by a trade sucker punch as they sold off in yesterday’s afternoon session in response to Trump’s announcing a new set of tariffs. Early session gains which had the S&P500 up around +1% quickly reversed with the S&P500 closing down by -0.90%, the Dow Jones Industrial Average falling by -1.05%, the Russell 2000 dropping by -1.51%, and NASDAQ 100 pulling back by -0.61%. Bonds rallied pushing 10-year treasury yields down by -12 basis points to 1.89%. Gold rallied by +2.22% as investors piled into the commodity on fears of inflation caused by lower rates and increased tariffs.
WHAT’S NXT
- This morning we will get the monthly employment situation from the Bureau of Labor Statistics. Non Farm Payrolls are expected to have grown by +165k compared to last month’s growth of +224k. The Unemployment Rate is expected to have fallen from 3.7% to 3.6% and Average Hourly Earnings are expected to have grown by +0.2% for the month.
- University of Michigan Consumer Sentiment is expected to come in at 98.5 vs. the last read of 98.4.
- Pre bell earnings include Noble Energy, Newell Brands, Chevron, Exxon Mobile, and Sprint.
- Next week we will get services PMI’s, JOLTS job openings, and the Producer Price Index. Next week we will begin to hear from Fed speakers.
Have a great weekend!
daily chartbook 2019-08-02