China retaliates against higher proposed U.S. tariffs. Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities pressured by trade tensions. Global equities declined by 0.8% last week following heightened trade tensions between the U.S. and China1. U.S. equities dropped 0.4%, while non-U.S. developed markets and emerging markets experienced larger declines of 1.0% and 2.1%, respectively2. The weekly decline left the year-to-date return for emerging market equities at just 3.4%, significantly behind both U.S. (17.9%) and non-U.S. developed market equities (10.5%)3. Interest rates continued to slide lower with the 10-year Treasury yield at 1.74% and just 9 basis points above the 2-year Treasury yield (1.65%)4. Yields remain low in Europe as well with the 10-year German Bond yield at -0.58%5. One notable exception in interest rates last week was Italy, which saw its bond yields rise as markets reacted to concerns that its governing coalition would break apart and new elections would be held in October6.
China retaliates against higher proposed U.S. tariffs. Following the early August U.S. announcement that it will be raising tariffs on goods from China, China retaliated last Monday by letting its currency weaken to more than 7 renminbi per U.S. dollar. China’s currency move may help the export side of its economy in the near-term, but also risks lost investor confidence in its financial markets. Soon after, the U.S. formally labeled China as a currency manipulator. While largely a symbolic move, it still indicates that tensions are likely to remain high between the U.S. and China in the near-term. Late last week, the U.S. also delayed a decision to offer licenses for U.S. companies to do business with Chinese technology company Huawei7.
Central banks continue to ease policy. Last week featured rate cuts from central banks in a number of countries including New Zealand, India and the Philippines. The New Zealand central bank’s rate cut was larger than expected at 50 basis points. Meanwhile, lower interest rates and higher trade tensions have led investors to increase their expectations for Federal Reserve rate cuts8. Fed funds futures currently imply an 87% probability of at least two more rate cuts in 2019 and a 78% probability of at least three rate cuts by June 20209.
Mixed economic data last week across the globe. Economic data releases pointed to a mixed economic environment globally last week. In the U.S., the services industry continues to expand, while the manufacturing sector is currently in contraction mode. China trade data topped expectations significantly, including a surprise increase in exports. Finally, the U.K.’s economy contracted in the second quarter, representing the first such occurrence following the 2016 Brexit vote.
This Week Preview
U.S. inflation expected to stay mostly unchanged from prior levels. Consumer Price Index (CPI) data will be released in the U.S. this Tuesday. Headline CPI is expected to tick up to 1.7% year-over-year (y/y), while core CPI is expected to remain unchanged at 2.1% y/y. Recent declines in oil prices (down over 10% since mid-July) will likely pressure headline inflation in the coming months. In other U.S. data releases this week, retail sales and consumer sentiment data will offer an update on a key segment of the U.S. economy that has continued to hold up.
Little change expected in China industrial and consumer data. Industrial production and retail sales data will be released in China this Tuesday. Industrial production is expected to remain close to the prior level, while retail sales are expected to drop modestly. Investors continue to closely track both U.S. and China economic data points to gauge impacts from the U.S.-China trade war.
Investors following company commentary in remaining earnings calls. Though second quarter earnings season is nearly complete (91% of S&P 500 companies have reported earnings), company guidance and upcoming earnings calls may offer investors some insight into how companies are reacting to the next round of U.S. tariffs on Chinese goods. Notable companies reporting this week include Walmart (WMT), Deere & Co. (DE) and Cisco Systems (CSCO)10.
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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- 1. Bloomberg, MSCI World Index returns 05Aug2019 – 09Aug2019.
- 2. Bloomberg, MSCI U.S. Equities IMI Index 05Aug2019 – 09Aug2019. MSCI World ex-U.S. IMI Index returns 05Aug2019 – 09Aug2019. MSCI Emerging Market Equities Index returns 05Aug2019 – 09Aug2019.
- 3. Emerging Market Equities Index returns 02Jan2019 – 09Aug2019. Bloomberg, MSCI U.S. Equities IMI Index 02Jan2019 – 09Aug2019. MSCI World ex-U.S. IMI Index returns 02Jan2019 – 09Aug2019.
- 4. Bloomberg, 10-Year Treasury Rate 05Aug2019 – 09Aug2019. Bloomberg 2-Year Treasury Rate 05Aug2019 – 09Aug2019.
- 5. Bloomberg, German Government 10-Year Bond Yield Rate 05Aug2019 – 09Aug2019.
- 6. Bloomberg, Italy Government 10-Year Bond Rate 05Aug2019 – 09Aug2019.
- 7. Domm, Patti. CNBC. China Fire biggest warning shot yet in trade war and now it’s up to Trump to decide how far to go. Retrieved on 12Aug2019 from https://www.cnbc.com/2019/08/05/china-fires-biggest-shot-yet-in-trade-war-and-now-its-up-to-trump.html.
- 8. Smith, Elliot. CNBC. Central banks around the world are surprising markets with aggressive rate cuts: Here’s why. Retrieved on 12Aug2019 from https://www.cnbc.com/2019/08/07/central-banks-are-cutting-interest-rates-aggressively-here-is-why.html
- 9. Bloomberg, Fed Funds Futures Index 12Aug2019. 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.
- 10. Thomson Retuers. S&P 500 Earnings Dashboard. 12Aug2019 Retrieved from http://lipperalpha.financial.thomsonreuters.com