The Market Today
Trade Fears Greet Investors for Third Week in a Row
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Manufacturing, Services, Auto Sales, Construction, Trade, Jobs, and FOMC Minutes – and Fireworks:
This week’s calendar is packed with data including both ISM reports, the FOMC Minutes, June’s labor reports, and data on construction spending, vehicle sales, and the trade balance. The calendar kicks off this morning with the ISM Manufacturing Index (9:00 a.m. CT) which is expected to remain high. Also this morning, May’s construction spending data’s expected to show another modest 0.5% MoM increase in construction activity, likely continuing to be driven by increased home improvement – a theme we expect to continue so long as mortgage rates remain higher.
The most important data of the week will come after the Independence Day holiday (markets closed) on Wednesday. The FOMC’s June Meeting Minutes are scheduled for Thursday and June’s labor reports for Friday. Economists expect another solid month of job growth but investors will be more focused on how strong wage growth was. Economists expect average hourly earnings increased 0.3% MoM bringing the YoY rate up to 2.8%.
Overnight – Trade Worries Remain the Focus: For a third time in three weeks, global equities have stumbled heading into Monday’s U.S. session as investors stare down Friday’s effective date for U.S. tariffs on $34 billion of Chinese imports. China has planned equal retaliation. Weeks of ramped up rhetoric about proposed tariffs and speculation they could lead to a full-blown trade war have weighed on global markets, with those in China being some of the hardest hit. Overnight, Chinese equities were again the weakest performer with the CSI 300 down almost 3% at a new 12-month low. European equities tracked the losses across Asia with the Stoxx Europe 600 trading 0.8% lower. In addition to the ongoing trade concerns, investors were watching reports of an ongoing skirmish in German Chancellor Merkel’s coalition. The recent EU deal on migration seems to fall short of satisfying Merkel’s coalition partner, the CSU, and has reportedly strained their working relationship. These various dynamics were affecting currencies as well. The flight to quality has boosted the Dollar and Yen. China’s Yuan extended its recent retreat on trade fears and the Euro softened on the uncertainty around German politics. Treasury yields fell, with the 2-year yield 1.8 bps lower (2.51%) and the 10-year yield down 2.6 bps (2.83%); the spread between the two dropped to a new cycle low of 31.2 bps (0.31%).
ICYMI – June 29, 2018 Weekly Market Recap: Trade tensions remained the biggest focus for investors last week and overshadowed, again, a heavy slate of economic data. The S&P 500 ended down 1.3% as first-half weakness proved too much for modest gains later to overcome. It was reported June 24 (Sunday) that the U.S. would implement significant measures to cut off Chinese investment in U.S. technology. And while the accuracy of that report was disputed by the White House in the following days, the negative effects to investor psyche weren’t fully reversed. Tech led the weakness for the major U.S. indexes which were kept afloat by strength in energy companies. Oil prices rallied sharply after the White House said it would pressure allies to cut off buying from Iran, compounding supply worries from Canada and Libya and negating the effect from increased OPEC supply. On the data front, consumers were slightly less confident in June and unexpectedly slowed their spending in May. However, income growth remained strong and the savings rate encouragingly ticked up. Business investment got a boost as a strong April revision which made the recent trend look stronger than expected. And the goods-only trade deficit shrank much more than expected. Combining those reports with a lower 1Q benchmark, growth in 1Q was revised down from 2.2% to 2.0%, most 2Q growth estimates remain above 4%. On monetary policy front, Friday showed core PCE inflation finally achieved the Fed’s 2% target for the first time since 2012. Click here to view the full recap.