Weekly Review Brief - October 7, 2019

Posted by FlexShares on Oct 7, 2019 11:28:52 AM

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U.S. plans to impose tariffs on $7.5 billion worth of European goods. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities pressured by weakening growth data. A combination of softer-than-expected economic data and the possibility of the U.S. targeting Europe with more tariffs, led to a weekly global equity decline of 0.9%1. All major equity regions declined, but non-U.S. developed market equities (-2.0%) dropped the most2. However, equity markets received some support late last week on expectations that the weaker economic backdrop would force the Federal Reserve (Fed) to step in with additional easing in its October meeting. Market expectations for an October Fed rate cut increased from 43% early last week to 73% by last Friday3. Fixed income markets responded to the growth and trade uncertainty as well with the 2-year Treasury yield declining by 23 basis points. The 2-year yield moves helped add some steepness to the yield curve with the 10-year yield now 13 basis points above the 2-year yield4.

Manufacturing data continues to weaken. U.S. economic data last week pointed to a slowing growth picture. Beginning last Tuesday, the ISM manufacturing Purchasing Managers’ Index (PMI) reading fell further into contractionary territory (below 50) to 47.8 after economist surveys expected a recovery to 50.1 in September. August’s factory orders figure failed to soothe financial markets as orders declined 0.1% month-over-month (m/m) after growing by 1.4% in July. ISM’s non-manufacturing PMI data fell sharply by almost four points from August’s reading to 52.6. While the measure remains in expansionary territory, the drop in this services sector reading is notable because strength in the services segment of the economy has been a key theme helping ease investor concerns on the U.S. growth outlook.

Solid U.S. labor market shows only minimal signs of softening. The monthly U.S. labor market report included a 136k jobs added figure that modestly disappointed versus expectations. However, the unemployment rate declined to a new recent low at 3.5%, despite expectations for an unchanged reading. Furthermore, wage growth fell noticeably short of expectations with a reading of 2.9% year-over-year (y/y), compared to a 3.2% y/y consensus expectation. Investors will likely view the decline in wage growth as a sign that upward pressures on inflation are not imminent.  

U.S. plans to impose tariffs on $7.5 billion worth of European goods. In the week prior, the World Trade Organization (WTO) concluded that the European Union (EU) had been illegally subsidizing Airbus, which created disadvantages to U.S. businesses. As a result, the U.S. plans to implement tariffs on $7.5 billion of European goods beginning on October 18. The U.S. will hit aircrafts with 10% duties, while other agricultural and industrial products will face duties of 25%5.

This Week Preview

U.S. and China set to hold high-level trade talks. Top trade officials from the U.S. and China will meet on Thursday and Friday. President Donald Trump has stated that the U.S. is not looking for a small deal, but expectations remain very low for a wide-scale U.S.-China trade agreement. Some modest easing in trade tensions is not out of the question, perhaps including the U.S. further delaying the incremental 5% tariffs on $250 billion worth of Chinese goods it is set to implement on October 156.

Little change anticipated in U.S. inflation data. After two 25 basis point rate cuts in 2019, the Fed and investors will review upcoming inflation data to see if the Fed’s actions have started to help stimulate persistently low inflation7. Headline and core Consumer Price Index (CPI) data will be available on Thursday with expectations for a slight increase in the headline reading and no change in the core figure. In other items related to the Fed this week, the September Fed meeting minutes will be released and a number of Fed leaders including Fed Chair Jerome Powell will speak publicly.

U.K. PM Johnson working towards Brexit solution. In addition to the tariff situation with the U.S., the EU will also be evaluating U.K. Prime Minister Boris Johnson’s pitch to solve the Brexit issue this week. Johnson currently plans to swap the Irish backstop component in the EU deal with two new borders that include an Irish customs frontier and a separate U.K. and Northern Ireland frontier8.

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 30Sep2019 – 04Oct2019.
  2. 2. Bloomberg, MSCI World ex-U.S. IMI Index returns 30Sep2019 – 04Oct2019.
  3. 3. Bloomberg, Fed Funds Futures Index 04Oct2019. 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.
  4. 4. Bloomberg, 2-Year Treasury Rate 30Sep2019 – 04Oct2019. Bloomberg, 10-Year Treasury Rate 30Sep2019 – 04Oct2019.
  5. 5. Lynch, David. The Washington Post. U.S. can impose tariffs on $7.5 billion in goods because E.U. gave illegal subsides to Airbus, WTO rules. Retrieved on 07Oct2019 from https://washingtonpost.com/business/economy/the-united-states-can-impose-tariffs-on-75-billion-in-goods-because-european-union-gave-illegal-subsidies-to-airbus-wto-rules/2019/10/02/021edc06-e51d-11e9-b403-f738899982d2_story.html.
  6. 6. Swanson, Ana. Bradsher, Keith. The New York Times. Trump’s Call to China to Investigate Biden Could Complicate Trade Talks. Retrieved on 07Oct2019 from https://www.nytimes.com/2019/10/04/business/economy/trump-biden-china-trade.html.
  7. 7. Bloomberg, Fed Funds Futures Index 04Oct2019. 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.
  8. 8. Douglas, Jason. The Wall Street Journal. Boris Johnson’s Irish Border Plan Leaves Companies Fretting. Retrieved on 07Oct2019 from https://wsj.com/articles/boris-johnsons-irish-border-plan-leaves-companies-fretting-11570281036.
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Tags: Weekly Market Update