U.S. issues new tariff threats towards Mexico. Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities slide lower on growth and trade concerns. Additional trade developments (see below) and concerns on the growth outlook, led to a 1.9% decline in global equities last week1. Emerging market equities (1.3%) managed a gain last week following a rough stretch over the past month, while U.S. and non-U.S. developed market equities dropped 2.6% and 1.8%, respectively2. Interest rates continued to move lower, with the 10-year Treasury yield (2.12%) shedding 20 basis points for the week and the 10-year German bond yield (-0.20%) reaching a new all-time low3. Though inversion concerns resurfaced in some areas of the yield curve, the 10-year Treasury yield remains 20 basis points above the 2-year yield (1.92%)4.
U.S. issues new tariff threats towards Mexico. Late last week, the U.S. threatened to implement escalating tariffs starting at 5% on all Mexican exports unless Mexico finds a solution to reduce migration flows towards U.S. borders. This development will likely jeopardize passage of the United States-Mexico-Canada Agreement (USMCA) and represents a new page out of President Donald Trump’s playbook by directly linking immigration issues to trade5. In addition, China announced it would be issuing a list of restricted foreign entities that will be subject to additional government scrutiny, likely in retaliation of the U.S.’s moves to contain Huawei6.
Core PCE inflation matches consensus expectations. In last Friday’s release, core Personal Consumption Expenditures (PCE) was in-line with consensus expectations at 1.6% year-over-year. Core PCE is the Federal Reserve’s preferred inflation metric and has remained stubbornly below the Fed’s 2% target. In a speech last week, Fed Vice Chairman Richard Clarida reiterated the Fed’s view that weak inflation is transitory. However, he acknowledged that a policy adjustment may be needed if inflation remains persistently below 2% or risks to the growth outlook increase. Market expectations of a Fed rate cut further increased last week, with the implied probability of a cut by year-end now up to 95% – its highest level in 2019 so far.
Establishment parties lose some ground in European elections. Increased fragmentation of the electorate led to the mainstream center-right and center-left parties losing their combined majority. Outside the traditional parties, nationalist-oriented parties gained seats but not quite as many as anticipated, while left-leaning, pro-Europe parties made gains as well. Looking ahead, European leaders will work to reach agreement in the coming weeks to appoint new leaders for the European Commission and the European Central Bank (ECB). The ECB President appointment will be of most interest to financial markets7.
This Week Preview
ECB meets this week while Fed leaders set to discuss inflation. The European Central Bank (ECB) meets this Thursday, though no change in interest rate policy is expected. The central bank will likely address the terms of its recent additional round of Targeted Longer-Term Refinancing Operations (TLTROs) to help support banks in Europe8. In the U.S., the Chicago Fed will host a conference featuring discussion on how the Fed could adjust its inflation targeting framework. A change in the Fed’s inflation construct may lead to a more dovish Fed in the near-term since core inflation has remained below the Fed’s 2% target for nearly all of the last 10 years. However, the Fed is unlikely to announce changes to its inflation targeting framework immediately following the conference9.
U.S. labor market expected to show continued strength. This Friday will feature the May U.S. jobs report, where economist surveys are expecting 185k jobs added. Both the unemployment rate and wage growth are expected to remain even with their respective prior levels of 3.6% and 3.2% year-over-year. Additional data set to be released this week includes the final set of May Purchasing Manager’s Index (PMI) figures as well as the ISM Manufacturing Index in the U.S. Given ongoing concerns on the growth outlook, this data should draw attention from investors as they look for any signs of improvement following across-the-board disappointment in the May flash PMI readings.
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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.
- 1)Bloomberg, MSCI ACWI (All Country World Index) returns 27May2019 –31May2019.
- 2) MSCI Emerging Market Equities Index returns 27May2019 –31May2019. MSCI U.S. Equities IMI Index returns 27May2019 –31May2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 27May2019 –31May2019.
- 3) Bloomberg, 10-Year Treasury Rate 27May2019 –31May2019. Bloomberg, German Government Bonds 10-Year Rate 27May2019 –31May2019.
- 4)Bloomberg, 2-Year Treasury Yield Rate 27May2019 –31May2019.
- 5) Radnofsky, Louise & Mauldin, William and Luhnow, David. Trump Threatens Tariffs on Mexican Imports in Response to Migrant Surge. Wall Street Journal. Retrieved on 3Jun2019 from https://wsj.com/articles/trump-threatens-5-tariff-on-mexican-imports-beginning-june-10-11559260679.
- 6) Jing, Meng. Tech cold war: how Trump’s assualt on Huawei is forcing the world to contemplate a digital iron curtain. South China Morning Post. Retrieved on 27May2019 from https://scmp.com/tech/big-tech/article/3011700/tech-cold-war-how-trumps-assault-huawei-forcing-world-contemplate.
- 7) Kaufmann, Eric. How Progressivism Enabled the Rise of the Populist Right. Quilette. Retrieved on 27May2019 from https://quillette.com/2019/05/27/how-progressivism-enabled-the-rise-of-the-populist-right/
- 8) Ranasinghe, Dhara. Carvalho, Ritvik Mason, Josephine. Drum roll for TLTRO 3: Five questions for the ECB. Reuters. Retreived on 2Jun2019 from https://reuters.com/article/us-eurozone-markets-ecb-graphic/drum-roll-for-tltro-3-five-questions-for-the-ecb-idUSKCN1T400F
- 9) Michel, Norbert. Forbes. The Fed’s June Conference Should Explore A Single Mandate: Monetary Neutrality. Retrieved on 31May2019 from https://www.forbes.com/sites/norbertmichel/2019/04/29/the-feds-june-conference-should-explore-a-single-mandate-monetary-neutrality/#1e58581f3d90
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