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  • May 13, 2019

Week in Review

Week Ending: Friday, May 10, 2019

Recap & Commentary

A sharp escalation in trade tensions between the U.S. and China resulted in a global equity market selloff. For the S&P 500, it was the worst week since December. The selling was triggered by an announcement from President Trump that the U.S. was prepared to increase tariffs on Chinese goods in response to what the administration said was an attempt by China to backtrack on substantial commitments it had made during recent trade talks. Those commitments were central to resolving core concerns of the U.S. regarding forced technology transfers, and theft of intellectual property and trade secrets. The news caught markets off guard and dashed hopes that an official announcement about a trade deal might be imminent.

According to China’s lead negotiator, the threat of higher tariffs did not constitute a deal breaker, in fact “ Quite the opposite, I think small setbacks are normal and inevitable during the negotiations of both countries”. However, he noted that despite reaching “mutual understanding” on a number of issues, there were also differences regarding “significant issues of principle.” On those he said, China “cannot make concessions on such issues of principle.” Whether or not that means talks have reached an impasse remains to be seen. Ultimately we expect a deal will be completed. However, the events of the week revealed something we have been cautioning about recently- that following the first quarter, investors appeared to be too complacent about trade talks, effectively treating a successful outcome as a foregone conclusion.

While tariffs on $200B of Chinese goods did increase on Friday, from 10% to 25%, the increase did not effect imports already in transit. Given the pace of seaborne container ships, it will be approximately 2-3 weeks before the tariffs actually kick-in, providing investors with some hope that a resolution may be reached before then.

Economic Commentary

Consumer Credit rose a lower-than-expected $10.3B in March, or 3.1% annualized, suggesting Americans may be less motivated to spend, despite the strong labor market. Revolving credit (i.e. credit cards) fell $2.2B in March after rising $3.1B in February. Non-revolving credit, including student and auto loans, rose $12.5B in March vs. $12.4 billion in February.

International Trade- March’s trade deficit of -$50B was effectively inline with the consensus estimate. Closely watched within the broader number was the deficit with China, which totaled just under -$21B. Through the first quarter of the year, the trade deficit with China was -$80B vs. -$91B in 1Q18.

Inflation at both the consumer (CPI) and producer (PPI) level remains constrained. Headline CPI rose 2.0% on a year-over-year basis, while core CPI, excluding volatile food and energy prices, rose 2.1%, Y/Y. Headline and core PPI, rose 2.2% and 2.4%, respectively. None of the data is likely to persuade the Fed to consider changing its current “patient” approach to monetary policy.

Of Note

The government announced final regulations requiring drug companies advertising on TV to disclose list prices of medications costing more than $35 for a month’s supply. The change is expected to take place later this year.

Market Indices Week of 5/10

S&P 500                          -2.2%

Small Caps                     -2.5%

Intl. Developed              -2.8%

Intl. Emerging               -4.6%

Commodities                  -1.4%

U.S. Bond Market             0.3%

10-Year Treas. Yield         2.47%

US Dollar                          -0.2%

WTI Oil ($/bl)                     $62

Gold ($/oz)                     $1,287

The Week Ahead

  • Small Business Optimism
  • Import/Export Prices
  • Retail Sales
  • Industrial Production
  • Regional Manufacturing Data
  • Housing Starts
  • Consumer Sentiment

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