Week In Review 5.31.2019

Continued trade tensions resulted in a fourth consecutive weekly loss for the S&P 500. Bond yields fell as investors sought the relative safety of bonds, pushing the 10-Year Treasury yield to 2.13%, its lowest level since 2017. The decline widened the current inversion between the 10-Year Treasury and 3-Month T-Bill to -0.22%, the largest negative spread since 2007. Interestingly, the 2-10 spread, the difference between the yields on the 2-Year and 10-Year Treasuries rose slightly to end the week at 0.20%. In response to the concerns about slowing growth, expectations for a Fed rate cut by year end surged, ending the week at 91% for one rate cut, and 61% for two rate cuts.

Responding to recent decisions by the U.S. to increase tariffs on $200B of Chinese goods and effectively ban Chinese telecom giant Huawei from U.S. markets, China hinted at several retaliatory moves. The first would restrict exports of rare earth elements; minerals essential to the production of high tech devices including cell phones, cars, and defense applications such as lasers, and missile guidance systems. China is the leading producer of rare earths, accounting for 70% of global supply in 2018, according to the U.S. Geological Survey. China also announced plans to blacklist “unreliable” entities that violate market rules or block supplies to Chinese companies for “non-commercial reasons”. Such a ban could impact numerous  U.S. companies.

Tensions between the U.S. and Mexico spiked after President Trump announced a 5% import tariff on all Mexican goods beginning June 10. The tariff will increase 5% per month thereafter, until reaching 25%, or until Mexico takes actions to alleviate the “illegal migration crisis”. In 2018, U.S. companies imported $346.5B in goods from Mexico, the U.S.’s largest trading partner.