Up, down, to, and fro.

Up, down, to, and fro.  Markets bounced yesterday on the President’s reporting that China wants a deal.  In the wake of last Friday’s disastrous session for stocks, Trump’s warmer tone offered a reprieve from the fear trade.

 
MY TWO CENTS
 
1. He said Xi said.  Stocks rallied yesterday after President Trump announced in a press conference that the Chinese called over the weekend and that they wanted a deal.  He further told reporters that he would consider delaying or easing some of the new, knee-jerk sanctions he announced on Friday night.  The news was enough to prompt traders to jump in and buy stocks.  Meanwhile the Wall Street Journal reported yesterday that the Chinese are “unaware” of any calls made to US delegates, casting doubt on the validity of the President’s statement.  To put a finer point on things, WHILE YOU SLEPT, The People’s Daily, the communist party of China’s official paper, reported that the US should not misjudge China’s determination to retaliate if the US follows through with Friday’s proposed tariff.  Reality appears to be at odds with Trump’s statements.  We are left with two conclusions: 1. the trade war is not coming to an end any time soon, and 2. betting against a Trump tweet will most likely lose money.
 
2. Keep your eye on the ball.  The potential drag on the US GDP brought on by the tariffs is a hot topic these days.  Many economists have come up with theoretical haircuts based on different tariff scenarios.  There is no question that the taxes are borne by US companies and ultimately the consumers.  Just how much remains to be seen, and though it will be significant, it will most likely not be enough to cause a recession in the US where economic numbers, though mixed, are still relatively positive.  The big concern for a recession is a potential slowdown in capital investment and consumer spending, the two principal drivers of growth.  I have written a great deal on the topic and today we will get a read of Consumer Confidence from The Conference Board which is expected to come in at 129.0.  Though the expectation is off from last month’s 135.7, it is still just below the index’s all time high.  Thankfully consumers continue to be confident and continue to do what they do best: consume.  But what of the more pragmatic businesses who carefully time out expenditures on both capital investments and hiring.  What drives them?  Clearly when businesses are doing well they press down on the accelerator, but if forecasts start to look murky, they tend to slow things down… which makes sense.  While it is not completely clear if the economy will worsen within the next twelve month’s, managers will be hard pressed to make definitive predictions with any level of certainty.  Conflicting economic numbers and narratives make forecasting very difficult.  Not unlike driving in the fog, business will slow down until things start to become clear.  The Fed has reported seeing companies holding back on capital expenditures due to uncertainty.  If that reticence to spend becomes more widespread, that will push the economy into a recession.
 
THE MARKETS
 
Stocks traded up yesterday after the President appeared to soften his stance from Friday’s fiery fit of anger.  The S&P500 climbed by +1.10%, the Dow Jones Industrial Average advanced by +1.05%, the Russell 2000 traded up by +1.13%, and the NASDAQ Composite Index jumped by +1.32%.  Bonds pulled back slightly and 10-year treasury yields ended the day unchanged at 1.53%.  The 2-year/10-year yield curve remained inverted closing at its lowest level since 2007 at -0.61 basis points.
 
WHAT’S NXT
 
– The Federal Housing Finance Agency House Price Index is expected to have climbed by +0.2% month over month compared to last month’s growth of 0.1%.
– The S&P Case-Shiller US National Home Price Index is expected to show a year over year growth of +3.30%, down from last month’s +3.43% growth.
– The Richmond Fed Manufacturing Index is estimated to come in at -2 compared to last month’s -12.
– The Conference Board will release its Consumer Confidence for August which is expected to come in at 129.0 compared to last month’s 135.7.
– The Treasury will auction off $40 billion 2-year notes.
– After the bell earnings include Hewlett Packard Enterprise, Autodesk, and Veeva Systems.
Please call me if you have any questions.
Best regards,
Mark

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