MCF Weekly Capital Market Review - September 9th, 2019
Trump continues to poke at China, claiming they are “eating the tariffs” and that the US will no longer be “taken to the cleaners.”[1] China so far has been dragging out the negotiation process and digging in their heels. This strategy worked for the past year or so as most tariff threats by Trump usually ended up revoked, delayed, or contained notable exclusions before being implemented. On October 1 the US is scheduled to raise tariffs from 25% to 30% on $250 billion of Chinese goods, in addition to 15% tariffs implemented September 1 and another round scheduled for December 15 covering an additional $300 billion.[2] As policy currently stands, virtually all imports from China will be tariffed by December 15. Both sides have announced an agreement to meet in early October.[3]
One reason for China to delay pins hope on a regime change resulting from the 2020 US presidential election, and a Democrat president with a more concessionary trade negotiation process. This still leaves 16 months of Trump tariff policy, assuming this coin flip scenario is played out (betting odds are a ~44% chance of a Trump re-election[4]). Trump counters this strategy by saying a less desirable trade deal will be offered to China if they delay until then. Other reasons include China having the means to temporarily offset some of the impact, such as recently lowering bank reserve ratios[5] and undergoing currency devaluation. These mechanisms may hide the damage in the short term, but there is no long-term substitute for removing obstacles to mutually beneficial trade between countries.
Fed Chair Powell’s appearance in Zurich was another anticlimactic one for markets, mostly reiterating past comments to support the US economy and a moderately positive outlook. Market participants are widely expecting another 25 basis point rate cut[6] and Powell did little to change these expectations despite the prior rhetoric framing July’s rate cut as a “mid-cycle adjustment” rather than a series of rate cuts.[7] It was the last scheduled opportunity for Powell to provide forward guidance on Fed policy before the September 18 meeting and there is strong market consensus contrary to the Fed that we are facing a series of cuts.
Construction spending and the ISM/PMI manufacturing indices show weak areas of the economy. Despite trade tensions, imports marginally increased but exports decreased. The many labor and employment reports reflect a strong and stable labor market with hints of capacity constraints and rising wage pressures. The unemployment rate stands at 3.7% and the labor force participation rate at 63.2%.
This week’s releases include PPI and CPI, retail sales, business inventories, and consumer sentiment.
INDEX RETURNS
[3] https://www.wsj.com/articles/china-and-the-u-s-will-hold-trade-talks-in-washington-in-october-11567651064
[5] https://www.reuters.com/article/us-china-economy-rrr-cut/china-cuts-banks-reserve-ratios-frees-up-126-billion-for-loans-as-economy-slows-idUSKCN1VR13X
[7] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190731.pdf
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REFLECTED INDICES
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Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.
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Bloomberg Barclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity. Investors cannot invest in an index.