The Market Today

THIS WEEK’S CALENDAR

Quiet Week Headlined by Job Openings and CPI Inflation: This week’s calendar is very quiet, particularly relative to last week’s deluge of reports and central bank decisions.  Tuesday will bring the June JOLTs report which continues to show more job openings than unemployed persons.  The focus for this week’s economic calendar will be Friday’ July CPI report which is expected to show Core CPI hold at 2.3% YoY.  We will be most interested in rents/rent-equivalents and medical care prices given their recent volatility.

 

TRADING ACTIVITY

Overnight – Markets Still Responding to Trade Concerns, Pound Pulls Back on Poor Self-Assigned Odds of a Deal with the EU: Global markets were mixed on Monday with larger Asian markets mostly lower in their first opportunity to respond to last Friday’s trade developments, shares of European companies moving in and out of positive territory, and U.S. futures hovering around unchanged. After Asian markets closed Friday for the weekend break, the Chinese central bank took steps to stabilize its currency and the government announced it had lined up varied tariff rates to retaliate against $60 billion of U.S. imports. Overnight, the Chinese yuan initially added to Friday’s gains but has since turned lower back towards Thursday’s 14-month low. China’s CSI 300 dropped 1.3% to end down more than 25% from its late-January peak and at its lowest level since September 2016. The Stoxx Europe 600 moved in and out of positive territory overnight but was recently down just under 0.2%. Brexit has been back in the spotlight recently and the British pound has been hampered by the negative headlines. Overnight, the British currency slipped below $1.30 to an almost one-year low against the U.S. Dollar. On Sunday, U.K. International Trade Secretary Fox said the odds that the country would fail to strike a deal with the EU at “60-40”. In the U.S., the Treasury curve was holding around Friday’s final levels; the 2-year at 2.65%, the 5-year at 2.82%, and the 10-year at 2.95%.

 

NOTEWORTHY NEWS

ICYMI – August 3, 2018 Weekly Market Recap: Investors had their hands full last week attempting to digest it all: three central bank decisions, a deluge of U.S. economic data, and another set of U.S.-China trade threats. The Bank of Japan elicited the biggest market response after it elected to leave policy rates unchanged but widen the acceptable trading range around its 0% peg for the 10-year Japanese government bond. As expected, the Bank of England hiked for just the second time since the Great Recession but continued to expect any additional tightening to be “gradual” and “limited”. The Fed’s decision was the least eventful but set the stage for a September hike with a “strong” assessment of the economy. The economic data stream was ceaseless: pending home sales, personal income and spending, PCE inflation, employment cost index, S&P home prices, consumer confidence, two ISM reports, construction spending, factory order, trade balance, and nonfarm payrolls. On trade, the U.S. said it was considering upping the proposed tariff rate from 10% to 25% on the additional $200 billion of Chinese imports. China later retaliated with a threat against $60 billion of U.S. goods. Click here to view the full recap.

 

Strong Corporate Earnings Season and Concerns About Price Increases: According to a report in the WSJ, companies are looking to push through price increases on the heels of an exceptional quarter.  “America’s biggest companies are reporting some of the strongest earnings growth since the recession, boosted by lowered tax rates and a robust U.S. economy that is fueling demand across industries. … Profits at S&P 500 companies jumped an estimated 23.5% in the three months through June, according to data from Thomson Reuters, more than 21/2 times revenue growth in the same period.”  However, this brings a challenge for the economy.  “Healthy consumer and business spending, coupled with rising commodity costs and concerns about potential tariffs, have spurred companies ranging from Kraft Heinz Co. to Winnebago Industries Inc. to try to push through price increases…” Investors are optimistic about companies’ ability to pass on price increases, a trend that can define later stages of an economic cycle.  Economic strength…  leads to inflation (and possibly imbalances)… leads to tighter monetary policy… leads to corrections.