The Market Today
Trade Negotiations Continue to Dismay of Global Markets
by Craig Dismuke, Dudley Carter
Trade Talks Remain the Focus: There are no economic reports on the calendar today although there are several Fed speakers. San Francisco’s Daly, Boston’s Rosengren, Dallas bank president Kaplan, and Fed Vice Chair Clarida are all on the calendar today. However, there seems to be a consensus agreement from Fed officials that policy will not be changed in the foreseeable future. As such, we do not expect any of the Fed officials to diverge from the general theme of this message. More important to investors will be the continued battle between Washington and Beijing. Already, the rhetoric has intensified and appears likely to escalate further (see below).
Can a Trade War Create a Recession: The 2018 experience with U.S. – China trade negotiations makes it clear that a trade war could easily cause a recession, not just in the U.S. but in other, connected countries. As trade uncertainty weighed on U.S. companies, business sentiment dropped swiftly and significantly. The spillover into the confidence and activity reports from other countries was also significant. Market volatility increased globally. However, both Trump and Xi should recognize this reality. As such, our basecase view continues to be that a deal will be resolved, despite all of the current machinations.
Overnight – Trade Tremors Keep Downward Pressure on Treasury Yields: Global equity markets have traded lower Monday as investors remain focused on the U.S.-China trade relationship after negotiations ended last week on an unexpectedly sour note. A week that was supposed to push negotiations into their final stages ended instead with the White House increasing tariffs on $200B of Chinese imports (more below). Chinese shares initially rallied Friday after the new tariffs were put into place, with some speculating that state-sponsored buyers stepped in to support the markets. However, The CSI 300 fell 1.7% Monday as trade tremors continued into the new week. White House advisor Kudlow said in a Sunday interview that the presidents from the two countries could meet at a G-20 meeting in June but there were no “concrete” plans in place. Earlier this morning, President Trump tweeted “China should not retaliate-will only get worse!” He added, “I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal, …You had a great deal, almost completed, & you backed out!” Just after 7 a.m. CT, China announced retaliatory tariff increases on a list of $60B of U.S. imports starting June 1. U.S. equity futures and Treasury yields fell to their lows of the day on the headlines. The S&P 500 was trading down 1.9%, the 2-year yield fell 6.3 bps to 2.20%, matching its lowest level since March 2018. The 10-year yield dropped 5.3 bps to 2.414%, a more-than-six-week low and just 0.04% above last Thursday’s effective Fed Funds rate.
ICYMI – May 10, 2019 Weekly Market Recap: Trade tensions were ratcheted up unexpectedly last week after a surprise tweet from President Trump on Sunday said the U.S. would increase tariffs on China because negotiations were moving too slowly. Additionally, he noted that the process for applying tariffs to the remaining balance of goods would begin soon. Chinese stocks sold off nearly 6% on Monday and the 10-year Treasury yield spiked lower at the open of Monday’s session. The tweet set off a string of events throughout the week that indicated the U.S. believed China had reneged on prior commitments to address key issues, including intellectual property theft and forced technology transfers. As threatened, the U.S. increased the tariffs rate on $200B of Chinese imports from 10% to 25% at 12:01 a.m. on Friday, eliciting a quick pledge from China for retaliatory countermeasures. Despite a Friday recovery, Chinese stocks ended the week down 4.7%. The S&P 500 slid in four of the five daily sessions, losing 2.2% and touching its lowest level in a month. While overshadowed by the trade headlines, U.S. economic data showed a larger-than-expected jump in job openings in March and another noisy monthly inflation report that shouldn’t sway the Fed away from its plan for patience. While Core CPI rounded up to 2.1% YoY in April, the monthly activity was weaker than expected as firmer rent and medical care inflation was offset by the biggest monthly drop for core goods prices since 2006. Click here to view the full recap.