Weekly Review Brief - August 26, 2019

Posted by FlexShares on Aug 26, 2019 12:26:31 PM

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China further escalates trade war with retaliation. Find out more in this edition of “The Week in Review.”

Last Week Review

China further escalates trade war with retaliation. China’s latest response to U.S. tariffs was more tariffs of its own on $75 billion of U.S. goods that will go into effect September 1 and mid-December (to which the U.S. responded with further tariffs of its own – now as high as 30% on some goods)1. Another volatile week led to a global equity return of -0.5%2. Reviewing fixed income markets, the yield curve once again flirted with inversion, with the 2 year-10 year spread finishing the week virtually flat3. Credit spreads, however, remain healthy – actually tightening during the week4.

Global monetary policy inching more dovish. At Friday’s Jackson Hole conference, Fed Chairman Powell stated that officials would make appropriate decisions to sustain the expansion. Following his comments, Fed funds futures increased to about a 90% probability of at least 2 more rate cuts in 20195. July’s Fed meeting minutes were also released last week. There was no firm consensus for further rate cuts, but that was before the recent uptick in trade tensions, making them somewhat stale6. July’s European Central Bank (ECB) meeting minutes were published as well with officials focused on stubbornly low inflation. To stimulate inflation, officials are considering changing the target and will likely cut rates further below zero and restart the asset-purchase program at the September 12 meeting7.

Downside surprises from U.S. Flash PMI data. Flash Purchasing Managers’ Index (PMI) data increased in most regions except the U.S. At the manufacturing level, readings observed small upticks in Japan and Germany to 49.5 and 43.6, respectively. Europe experienced a larger move up to 47.0 while the U.S. decreased by the same amount to 49.9. The fall of the U.S. reflects the poor state of global manufacturing with all of the major regions in contractionary territory (below 50). The service sector, making up a larger portion of the economy, has held up better with Germany and Europe comfortably in expansionary territory. The U.S. fell closer to the dividing line dropping by more than 2 points to 50.9.

Retail earnings temporarily boost markets. Target followed up Walmart’s strong second quarter earnings to soothe investor worries about consumer spending in the U.S. Target’s share price increased about 20% last Wednesday as it beat consensus estimates and projected higher earnings in the full-year guidance report. Looking at the U.S. picture more broadly, 97% of S&P 500 companies have reported earnings for the second quarter resulting in 1.7% year-over-year (y/y) earnings growth and 3.6% y/y sales growth. Both measures have exceeded analysts’ estimates8.

 

This Week Preview

U.S. growth figures to gauge economic health. Key economic data points including the second quarter’s revised growth numbers on Thursday and durable goods on Monday, will give investors an idea of how the U.S. economy is holding up in comparison to China. After consumer spending drove growth in the first reading, investors will pay attention to any dramatic revisions in the second. The consumer sentiment reading from the University of Michigan has been trending lower since May, but has the potential to move higher after strong retail earnings. China releases growth indicators on Friday. Similar to many of the major developed countries, China’s manufacturing PMI is in contractionary territory and expected to fall slightly further while the service PMI is expected to remain stable and in expansionary territory.

Global inflation expected to remain muted. For the last decade, the majority of the developed country central banks have failed to hit most central banks 2% target for at least 50% of the time. The U.S. has exceeded the target, about 5% of the time, while Europe has not exceeded the target at all. Inflation expectations have not moved higher with economist surveys showing a flat reading for core Personal Consumption Expenditure reading of 1.6% y/y. Germany’s headline Consumer Price Index (CPI) figure is expected to fall to 1.5% y/y and Europe’s flash CPI is expected to also slightly fall to 1.0% y/y.

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. Pramuk, Jacob. CNBC. Trump will raise tariff rates on Chinese goods in response to trade war retaliation. Retrieved on 26Aug2019 from https://cnbc.com/2019/08/23/trump-will-raise-tariff-rates-on-chinese-goods-in-response-to-trade-war-retaliation.html.
  2. 2. Bloomberg, MSCI World Index returns 19Aug2019 – 23Aug2019.
  3. 3. Bloomberg 2-Year Treasury Rate 19Aug2019 – 23Aug2019. Bloomberg, 10-Year Treasury Rate 19Aug2019 – 23Aug2019.
  4. 4. Bloomberg Barclays US Credit Index 19Aug2019 – 23Aug2019.
  5. 5. Bloomberg, Fed Funds Futures Index 23Aug2019. 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.
  6. 6. Federal Open Market Committee. (July 30-31, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 26Aug2019 from https://federalreserve.gov/newsevents/pressreleases/monetary20190821a.htm
  7. 7. Blackstone, Brian. The Wallstreet Journal. ECB Minutes Back Up Signals of Broad Stimulus Package. Retrieved on 26Aug2019 from https://wsj.com/articles/ecb-minutes-back-up-signals-of-broad-stimulus-package-11566478973.
  8. 8. Thomson Retuers. S&P 500 Earnings Dashboard 26Aug2019. Retrieved from http://lipperalpha.financial.thomsonreuters.com

Tags: Weekly Market Update