Week in Review
Week Ending: Friday, August 9, 2019
Recap & Commentary
Global equity markets ended the week lower as investors weighed the longer-term ramifications of escalating trade tensions, unexpected rate cuts from central banks outside of the US, and further declines in global bond yields.
Trade— On Monday, global anxieties spiked after China retaliated against the US’ latest tariff threat (a 10% tariff on an additional $300 billion in Chinese imports effective Sept. 1st) by weakening its currency beyond 7.00 CNY/USD for the first time since 2008. China also halted planned agricultural purchases. The US then responded by formally and controversially designating China a “currency manipulator,” which is a largely symbolic gesture that now requires both countries to consult with the International Monetary Fund. By Tuesday, Beijing assuaged concerns that the trade war was developing into a currency war after it signaled that it wouldn’t permit a steeper depreciation in the Yuan.
Global Rate Cuts— Central banks in New Zealand, India, Thailand, and the Philippines cut interest rates and communicated a willingness to further ease monetary conditions in an effort to soften trade war induced headwinds.
Global Bond Yields— Government bond yields plummeted to multiyear lows around the world. According to Bloomberg data, ~25% (roughly $15 trillion) of bonds issued worldwide are now trading at negative yields.
US Rates— Recent market turmoil has also caused a jump in the market-implied probabilities of a September rate cut. Specifically, federal-funds futures, which are used by traders to wager on the direction of monetary policy, show a 100% chance of a rate cut following next month’s FOMC meeting.
Economic Bullet Points
Inflation— The producer price index (PPI) at the headline level rose 0.2% in July, matching the consensus expectation. The increase was driven by a 0.4% rebound in energy prices, over half of which was due to higher gasoline prices. Conversely, core PPI, which excludes volatile food, energy, and trade services costs, declined -0.1%, falling for the first time since February 2017. On a y/y basis, headline PPI edged up marginally in July to 1.7% from 1.6% in the prior month. But core PPI eased to 1.7%, its slowest pace since mid-2017. In sum, the July report suggests that rising inflation is not a threat, leaving ample room for the Fed to cut interest rates further.
US Services sector reports were mixed in July, but overall, popular composites tracking the data remain above 50, indicating that the services sector is still in expansion territory. Report details, however, showed signs that global growth and trade headwinds are now extending beyond the manufacturing sector.
Consumer Credit came in below expectations, up only $14.6 billion in June as consumers paid down credit card debt following increased spending in recent months. Revolving credit (credit cards), slid -$0.1 billion in June after rising $7.5 billion previously, while nonrevolving credit (student and auto loans) rose $14.7 million versus May’s $10.3 billion increase.
The average US tariff rate has steadily increased over the past 18 months. Imposing 10% tariffs on an additional $300 billion of imports from China on Sept 1st would lift the average tariff rate to 6% from 1.5% at the end of 2017.
|U.S. Bond Market||0.6%|
|10-Year Treas. Yield||1.73%|
|WTI Oil ($/bl)||$56|
The Week Ahead
- Retail Sales
- Industrial Production
- Housing (Multiple Reports)
- Multiple Sentiment Reports
- Jobless Claims