Weekly Review Brief - August 5, 2019

Posted by FlexShares on Aug 5, 2019 1:22:04 PM

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Sales improvement in China helps Apple beat earnings. Find out more in this edition of “The Week in Review.”

Last Week Review

Fed policy and trade drive Treasury yields lower. News of additional U.S. tariffs set to be implemented on China, drove both equity markets and Treasury yields lower late last week. The 10-year Treasury yield dropped by 23 basis points to end the week at 1.85% – leaving it 14 basis points above the 2-year yield (1.71%)1. Global equities fell 3.1% last week, with emerging market equities hit the hardest with a 4.2% decline2.

Federal Reserve cuts Fed funds rate to 2.25%. In its first cut since the financial crisis, the Fed moved the main policy rate down to the 2.0% - 2.25% channel. Fed Chairman Powell stated that uncertainties to the global economy and persistently low inflation led to the interest rate cut and the decision to stop the balance sheet reduction on August 1 as opposed to October. Powell’s message on the future rate path confused investors as he stated that the Fed’s decision did not begin a rate cut cycle before walking back that statement. Investors expect more Fed cuts in 2019 and rising trade tensions should continue to pressure the global growth outlook3. Fed funds futures are now pricing in about a 79% probability of at least two more rate cuts by year end4.

President Trump announces more tariffs on Chinese goods. U.S. President Donald Trump plans to implement a 10% tariff on $300 billion of Chinese goods on September 1. This round of tariffs will affect items such as consumer goods. The new tariffs reflect Trump’s frustration with progress on U.S.-China trade talks and China’s hesitation to increase purchases of U.S. agricultural products. Trade discussions are expected to resume next month but tensions will likely remain elevated5. The manufacturing sector of both countries has been softening with China’s Purchasing Managers’ Index (PMI) reading in contractionary territory and the U.S. ISM PMI reading trending lower to 51.2.

July jobs report reflects continued stability in the labor market. There were 164k jobs added in July, just shy of survey expectations and the average from the previous three months. The unemployment rate maintained its 3.7% level after ticking up in June. In inflation-related data, the core personal consumption expenditures reading and wage growth from the jobs report moved up slightly from prior readings to 1.6% year-over-year (y/y) and 3.2% y/y, respectively.

Sales improvement in China helps Apple beat earnings. After two prior quarters with revenue in China dropping 20%, sales in the most recent quarter fell just 4% y/y. Apple CEO Tim Cook believes China’s stimulus efforts helped improve sales of all Apple services6. Looking at earnings season more broadly, 387 S&P 500 companies (77%) have reported thus far with earnings and sales growth ahead of consensus expectations at 1.3% y/y and 3.3% y/y, respectively7.

This Week Preview

China data will help investors gauge its economic health. Following escalating trade tensions with the U.S. last week, China will likely come forth with a response. Investors will closely follow China’s answer to see the impact on financial markets. Rather than respond with higher tariffs on U.S. imports, China is more likely to increase scrutiny on U.S. businesses operating in China through inspections and delayed regulatory approvals. However, China pushing too far with these measures would encourage U.S. companies to leave China, adding to the pressures on the Chinese economy. Economic data this week will provide an idea of how China’s economy is holding up as it faces trade tensions. Manufacturing PMI measures are expected to fall in line with the prior month while imports and exports are expected to shrink compared to July 2018. Further stimulus efforts may be required when U.S. tariffs go into effect September 1. Also related to the U.S.-China trade standoff, the U.S. may provide an update this week on its stance towards restrictions on Chinese technology company Huawei8.

Central banks in India and New Zealand likely to follow the Fed. The Reserve Bank of Australia, Reserve Bank of India and Reserve Bank of New Zealand all gather this week. Australia’s central bank is unlikely to cut its main policy rate after decreasing 25 basis points to 1% in July9. Both India and New Zealand’s central banks are expected to lower their policy rates by 25 basis points each to 5.5% and 1.25%, respectively10.

Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.

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End Notes

    1. 1. Bloomberg, 10-Year Treasury Rate 29Jul2019 – 02Aug2019. Bloomberg 2-Year Treasury Rate 29Jul2019 – 02Aug2019.
    2. 2. Bloomberg, MSCI World Index returns 29Jul2019 – 02Aug2019. MSCI Emerging Market Equities Index returns 29Jul2019 – 02Aug2019.
    3. 3. Federal Open Market Committee. (July 31, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 05Aug2019 from https://federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm
    4. 4. Bloomberg, Fed Funds Futures Index 05Aug2019. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.
    5. 5. Li, Yung. CNBC. Trump says US will impose 10% tariffs on another $300 billion of Chinese goods starting Sept. 1. Retrieved on 05Aug2019 from https://www.cnbc.com/2019/08/01/trump-says-us-will-impose-10percent-tariffs-on-300-billion-of-chinese-goods-starting-september-1.html
    6. 6. Lee, Dave BBC. Apple sales rise while iPhone revenues dip. Retrieved on 05Aug2019 from https://bbc.com/news/business-49170393
    7. 7. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 29Jul2019 from http://financial.thomsonreuters.com
    8. 8. Li, Yung. CNBC. Retrieved on 05Aug2019 from https://cnbc.com/2019/07/29/us-china-trade-talks-resume-in-shanghai-with-tempered-expectations.html
    9. 9. Pandi, Swati Reuters. Australia’s Central Bank ready to cut rates a gain ‘if Needed’. Retrieved on 05Aug2019 from https://reuters.com/article/us-australia-rba-minutes/australias-central-bank-ready-to-cut-rates-again-if-needed-idUSKCN1UB047.
    10. 10. Spratt, Stephen. Bloomberg. Traders Plot How to Play Rate Divergence of 5 Central Banks. Retrieved on 05Aug2019 from https://www.bloomberg.com/news/articles/2019-08-04/rates-markets-ripe-for-shake-up-as-five-asia-central-banks-meet

Tags: Weekly Market Update