Weekly Review Brief - July 1, 2019

Posted by FlexShares on Jul 1, 2019 2:17:25 PM

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Trade talks to continue post G20 meeting.  Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities flattish approaching G20. Global equities declined a bit early last week as U.S. central bankers seemed less willing to cut rates as far as investors would like before inching higher on hopes that China and the U.S. would potentially continue trade talks1. U.S. equities finished 0.1% lower, while markets outside the U.S. powered higher2. Global equities are up 16.6% year-to-date primarily driven by U.S. equities (18.8%) and non-U.S. developed markets (14.8%)3. Reviewing fixed income markets, high-yield spreads widened by 16 basis points and the 10-year U.S. Treasury yield fell by 4 basis points to 2.01%4.

Fed officials’ statements not dovish enough for the markets. Last week, Federal Reserve Chairman Jerome Powell, reiterated the case for lower rates as trade tensions have increased risks to the economy and weighed on business and consumer confidence. President of the St. Louis Fed and one of the most dovish Fed officials, James Bullard, hinted at a rate cut as well but declined to support the idea of a 50 basis point rate cut in comments last Tuesday. Fed funds futures were pricing in a 21% chance of a 50 basis point cut after Bullard’s comments versus a 40% chance prior. Investors will pay close attention to progress or deterioration to the U.S. and China relationship following G20 as it’s likely to heavily influence policy decisions for the central banks of both countries5.

Trade talks to continue post G20 meeting. The G20 meeting led to the U.S. and China agreeing to restart trade talks, pause any escalation of tariffs and the U.S. removal of the technology sales ban to Huawei. In turn, China will ramp up agricultural purchases from the U.S. Markets will view the development as moderately constructive but bouts of market volatility will likely occur whenever new information is released on the trade situation in the short term. In the long run, fundamental differences on China’s handling of intellectual property and regulatory practices are likely to keep U.S.-China relations in the spotlight6.

Global inflation still well below central banks’ target. Germany’s headline Consumer Price Index (CPI)  moved up to 1.6% year-over-year (y/y) along  with Europe’s core CPI to 1.1% y/y while U.S. core Personal Consumption Expenditures remained flat at 1.6% y/y. Consumer sentiment data for the month of May showed notable deterioration in the U.S. as well as a smaller decrease in Germany. Despite some small moves upward in inflation figures, slowing growth data in concert with trade tensions and waning consumer confidence are making compelling arguments for global central banks to adjust policies toward more accommodation.


This Week Preview

Employment report looks to recover after poor May figure. May’s jobs added figure fell below 100k jobs for the second time in 2019 with a reading of 75k. Economist surveys expect a rebound in June with 160k jobs added on Friday in a shortened trading week due to the 4th of July holiday in the U.S. The unemployment rate is expected to remain steady at 3.6% while wage inflation is expected to tick up to 3.2% y/y. The Fed will look at employment data in addition to other data such as the ISM Purchasing Manager’s Index (PMI) data closely to determine the timing and size of a potential rate cut. Surveys indicate declines in manufacturing and non-manufacturing PMI though both indicators should remain in expansionary territory (above 50). Fed officials Richard Clarida and John Williams will speak early this week and may offer investors insight on how the Fed is digesting the outcome of the G20 negotiations.

No major changes expected in Europe and China growth data. Outside of the U.S., Germany, Europe, the UK and China will post final June PMI readings. Germany and Europe are expected to report in line with June’s flash readings, while the UK is expected to increase slightly. Caixin China PMI data is expected to remain unchanged. Investors will continue to monitor global growth data as well as central bankers’ responses to slowing economic growth. Also, Australia’s central bank meets on Tuesday with markets pricing in a roughly 75% probability of a rate cut following a cut in June’s meeting.

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, MSCI World Index returns 24Jun2019 – 28Jun2019.
  2. 2. Bloomberg, MSCI U.S. Equities IMI Index 24Jun2019 – 28Jun2019. MSCI Emerging Market Equities Index returns 24Jun2019 – 28Jun2019.
  3. 3. Bloomberg, MSCI World Index returns 02Jan2019 – 28Jun2019. Bloomberg, MSCI U.S. Equities IMI Index 02Jan2019 – 28Jun2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2019 – 28Jun2019.
  4. 4. Bloomberg, High Yield Rate 24Jun2019 – 28Jun2019. Bloomberg 10-Year Treasury Rate 24Jun2019 – 28Jun2019.
  5. 5. Federal Open Market Committee. (June 19, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 28Jun2019 from https://federalreserve.gov/mediacenter/files/FOMCpresconf20190619.pdf
  6. 6. The New York Times. 5 Takeaways From the G20 Summit: Easing Off Trump’s China Trade War, for Now. Retrieved on 29Jun2019 from https://nytimes.com/2019/06/29/world/asia/g20-summit-takeaways.html

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