Just Kidding

Just kidding.  Markets went on a roller coaster ride first falling then skyrocketing after the President’s team announced that some tariffs on China would be delayed.  Markets opened lower on the heels of global tensions but quickly made an about-face after the Administration reversed course on trade… temporarily.

 

MY TWO CENTS

 

1.  Santa Claus in August??  Wait, what?  List 4is the actual list of items and goods classifications that were scheduled to be taxed by 10% starting September 1st, just weeks away.  On that list are items such as consumer electronics, smartphones, video game consoles, footwear, athletic clothing… sounds like a Christmas shopping list doesn’t it?  I don’t know about you, but we are last minute gift shoppers and I suspect many others are as well.  So imagine if just in time for the holidays, Apple, Nike, and Microsoft all raised their prices by 10%?  It doesn’t take a PhD in economics to figure out that it wouldn’t be good.  Perhaps, someone in the Administration decided to get the jump on the holiday shopping, figured it out, and sent a memo to the oval office, because yesterday morning the US Trade Representative Office announced that SOME proposed tariffs would be delayed.  The markets responded in-kind as stocks, down at the open, rallied and bonds reversed their climb sending yields higher.  The President decided to let everyone know that “We’re doing this for the Christmas season, just in case some tariffs would have an impact on US customers…”  I have been writing about this very thing since the Administration first began to tariff China, and I am glad that they are finally catching on, though I don’t think that they are subscribers to my daily note… yet.  Yesterday’s move marks the first admission that the Administration sees impacts on US companies.  By the way, what actually happened yesterday was that List 4 was split into two lists:  List 4b, which contains pricey gift items like sneakers, iPhones, xBoxes, and VCR’s (for some strange reason), and List 4a, which will still be tariffed starting on Sept. 1.  Wondering what’s on that list?  Amongst the many items are food items, lots of clothing including baby t-shirts and track suits, and live asses and primates.  See the full list here:  https://ustr.gov/sites/default/files/enforcement/301Investigations/List_4A_%28Effective_September_1%2C_2019%29.pdf?mod=djem_b_reviewpreview_20190813  What does it all mean?  More and more confusion for US companies who are clearly spending lots of money to insulate themselves from the ongoing battle.  For now, there is a bit of reprieve, and stock traders appreciate the gesture.  The uncertainty though, still offers more downside risk in the future, so caution is advised.

 

2.  I hate to be that guy… but.  I often remind my readers that the US domestic economy still has some legs but shows some signs of fatigue.  Fed stimulus can certainly help to ease some of the pressure in the US, but ultimately the global economy will be the biggest challenge.  Global cross currents, as Chairman Powell likes to refer to them, are really picking up.  WHILE YOU SLEPT, Germany announced that its GDP shrank by -0.1 in the last quarter, Eurozone Industrial Production shrank by -1.6% last month, and China announced that Industrial Production grew at just +4.8%, the lowest in 17 years and Retail Sales missed expectations coming in at +7.6%.  The challenges are mounting as cross currents turn into visible chop.  Bond traders, always the first to put in their votes, responded.  WHILE YOU SLEPT, the 2-year/10-year yield curve inverted.  The last time the curve was negative was in the summer of 2007, just before the financial crisis.  The curve inversion is seen as a strong predictor of recession and this puts more pressure on the Fed to act in the coming months.

 

THE MARKETS

 

Stocks surged yesterday in a relief rally brought on by the Administration announcing a delay on tariffs due to begin next month.  The S&P 500 rose by +1.48%, the Dow Jones Industrial Average jumped by +1.44%, the Russell 2000 climbed by +1.15%, and the NASDAQ Composite Index popped by +1.95%.  Not surprisingly the gains were led by the tech sector which climbed by +2.47% as the tariff moratorium clears the path for a good holiday season.  Bonds fell in response to the announcement and 10-year treasury yields climbed by +6 basis points to 1.7%.  Interestingly, 2-year treasury yields climbed by a greater +8 basis points bringing the 2-year/10-year yield curve to +3 basis points, its lowest close since early 2007.

 

WHAT’S NXT

 

– The Bureau of Labor statistics will announce Import Price Index, which is expected to have receded by -0.1% compared to last month’s -0.9% drop.

– The Department of Energy will announce its US Crude Oil Inventories, which are expected to show a draw down of -2.19015 million barrels for the week.

– Macy’s will announce earnings before the bell and after bell earnings will include NetApp, Cisco, and Canopy Growth.

daily chartbook 2019-08-14