Regrets, I’ve had a few

Regrets, I’ve had a few…. Stocks plunged on Friday in response to a trade war escalation while the Fed attempted to instill confidence.  Friday’s session was a roller coaster brought on by a series of Trump tweets, which overshadowed Powell’s dovish speech.

 

MY TWO CENTS

 

1.  Be careful what you wish for.  On Friday morning just as Americans headed out the door, news of a new retaliatory Chinese tariff hit the tape.  The new tax, due to take effect on September 1st, would exact a 5% and 10% tax on $75 billion of US imports.  The news was completely unexpected… or was it?  The Administration has been steadily increasing the pressure on China even as discussions appear (to those who look carefully beyond the soundbites) to be heading South.  A few weeks back, the Trump Administration announced that a new 10% tariff would be applied to $300 billion in Chinese goods only to pair it back and partially delay the tax’s onset for the Christmas season.  Then there is the matter of the President’s ratcheting up rhetoric on China over their treatment of protesters in Hong Kong.  So is it really surprising that China finally decided to hit back with some tariffs of its own?  It is after all a trade war.  Finally there is the matter of the Fed and interest rate policy.  The Administration has been hugely vocal in its desire for the Fed to lower rates to not only help spur economic growth, but also to counter the effects weaker global currencies are having on the dollar.  Recall that China just recently quietly allowed its currency to weaken causing the Administration to label it as a currency manipulator.  For its part, the Fed has maintained a dovish bias on monetary policy, cutting key rates last month.  The reason for the rate cuts was not so much a capitulation to the incendiary tweets by the President, but really in response to the global economic slowdown that is occurring partially, if not completely due to the trade war.  On Friday, Chairman Powell signaled a willingness to continue to lower rates in response to recent events in the global economy.  Equity markets responded positively driving indexes into the green only to be pummeled in response to Trump’s vow to hit back and an orderfor American companies to stop doing business with China.  He further referred to both Powell and China’s President Xi as enemies of the US.  Trump may get his rate cut next month as it appears that the trade war is far from over and will continue to drag on global economic growth and now increasingly on US manufacturing.  Expanding the trade war with China by adding additional tariffs which will now start to impact the US consumer, leaves the Fed in a tough position in which they may have no choice but to lower rates.  The President may get his rate cut, but unfortunately at the cost of pushing the world economies closer to the brink of recession.

 

2.  Where it stops nobody knows…. The wild ride experienced by investors last week was capped off by a Friday session that could make even the most seasoned traders grab for the Dramamine.  I wrote quite a bit last week about the facts behind the well-placed soundbites and tweets that have been confusing markets on not only the status of US negotiations with China, but also the state of the US Economy and interest rate policy.  Markets don’t like confusion and the potential for surprise, and if we walked away with anything on Friday it was only more confusion.  One thing is certain, the trade war is far from over.  On Friday night while YOU ICED YOUR WOUNDS from the day, the President announced on twitter that tariffs on $250 billion goods will go from 25% to 30% on October 1st and that tariffs due to take effect on September 1st would increase to 15% from 10%.  This weekend, WHILE YOU DREADED MONDAY the President, at the G-7 meeting in France appeared to express regret for levying tariffs.  Later on, the President’s team quickly clarified that the President only regretted not raising tariffs further.  Ouch. What does it mean for markets?  Unfortunately more confusion on the direction of negotiations, rates, and the economy.  Hopefully the week ahead will feature some constructive commentary to ease nerves so that cooler heads can prevail.

 

THE MARKETS

 

Stocks were trounced on Friday as China hit back and the President vowed to take the fight to the next level overshadowing Chairman Powell’s dovish comments which should have served to calm nerves and end the week on a positive note.  The S&P500 dropped by -2.59%, the Dow Jones Industrial Average fell by -2.37%, the Russell 2000 sank by -3.09%, and the NASDAQ Composite Index pulled back by -3.00%.  The Energy Sector, down -3.37%, was hit hard as the new Chinese tariffs would include crude oil.  Bonds rose and 10-year treasury yields fell another -8 basis points to 1.53%.  The 2-year/10year yield curve ended the week slightly inverted at -0.02 basis points.

 

WHAT’S NXT

 

– The US Census Bureau will announce Durable Goods Orders which were expected to have climbed by +1.2% month over month compared to last month’s +1.9% growth.

– The Dallas Fed Manufacturing Activity Index  is expected to come in at -4.0 compared to last months -6.3.

– Later this week we will get more regional Fed Indicators, housing price indicators, Pending Home Sales, The Conference Board’s Consumer Confidence, University of Michigan Sentiment, GDP, Personal Consumption, and the PCE Deflator.   Please refer to the attached economic and earnings release calendars for details.

daily chartbook 2019-08-25

earnings releases 8_26

econ numbers 8_26