Trade war tensions continued to take a toll on markets last week with equities finishing in the red, even more so for international equities. Gold continued its climb, breaking the $1,500-mark last week for a 1-year return of over 23% and reaching a 6-year high. The 10-year Treasury rate ended last week at 1.74%, a far cry from 2.66% at the start of the year. The yield curve has fallen and flattened since the beginning of the year, with intermediate and long-term rates falling more than short-term rates. An inversion of the yield curve is a closely watched but imperfect harbinger of a coming recession. An inverted yield curve would require yields to decrease as maturity increases. The yield curve is only partially inverted (U-shaped), with rates inverted until hitting the 5-year maturity but not inverted for longer maturities.
Major geo-political news last week involved the devaluation of the Chinese Yuan. In the past, China has prevented its currency from devaluing past the symbolic level 7 Yuan per 1 US dollar. On Monday, the Yuan broke through this level. Trump quickly pounced on the news, directing Treasury Secretary Mnuchin to label China a currency manipulator (another 2016 campaign promise). China claimed the Yuan currency movements were the result of market, not monetary, forces, and has since responded to backstop the slide. This claim is dubious given its timing (after a round of proposed 10% tariffs) and given that China has no issue controlling Yuan values; the devaluation is likely a warning signal to the US of possible retaliatory responses. A sustained devaluation would stimulate exports to the US, providing a buffer against the effects of the trade war. But it is one tool that Chinese authorities explicitly stated will not be used to fight a trade war because it would be at the expense of the Yuan’s stability, among other issues.
Indicators last week reflect muted inflation, strong labor markets, and a moderate growth economy. Despite the geo-political disruptions and headlines, economic fundamentals are not signaling a sustained slowdown. The US economy is slowing but still growing. There is concern about slowing global growth. The UK’s Q2 GDP was -0.2%, but this is a country facing an identifiable idiosyncratic uncertainty known as “Brexit.” In July, the IMF raised growth expectations for developed markets (mostly the US) and lowered growth expectations for developing economies, and noted that downside risks dominate global growth expectations.
This week’s top economic releases include CPI, retail sales, housing starts, consumer sentiment, and industrial production.
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