- Trade-War Tensions: $50 Billion Import Tariff Announced
- Federal Reserve Raises Key Interest Rate 0.25%
- U.S. Economic Strength Persists: Consumer/Producer Prices Rise
- Looking Ahead: Key Housing, Manufacturing & Service Sector Reports
Trade skirmishes may be escalating toward trade warfare if the U.S.’s imposition of $50 billion in tariffs on Chinese exports Friday sparks extended tit-for-tat retaliation.
Until this morning, when stocks took a tumble, markets had been fairly steady during an action-packed week on the world stage. A step in the right direction for the Korean peninsula (if just a baby step) and several positive U.S. economic reports, plus an unsurprising conclusion to the two-day Federal Reserve meeting, gave investors encouragement.
But as always when it comes to Wall Street traders, it is a fragile peace. Whether President Trump’s meeting with Kim Jong Un in Singapore will lead to material change in North Korea is anybody’s guess. We will certainly take handshakes and commitments to improved relations over Twitter threats and nuclear tests any day of the week. But we’re still a long way from verifiable denuclearization and disarmament.
For the year through Thursday, the Dow Jones Industrial Average has returned 2.9%, while the broader S&P 500 has gained 5.0%. The MSCI EAFE index, a measure of developed international stock markets, is flat with a 0.0% return. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.35% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.0% for the year.
Trade-War Tensions: $50 Billion Import Tariff Announced
Any initial goodwill from last week’s G-7 conference was dashed over the weekend after Canadian Prime Minister Justin Trudeau and President Trump exchanged barbs. While we would hope that longer-term economic self-interest could overcome any and all near-term political self-interest, only time will tell.
And, as was increasingly expected and noted above, the Trump administration announced this morning that it would impose tariffs on $50 billion of goods imported from China, and warned that any retaliatory actions would result in additional tariffs.
We will continue to monitor the implications for global trade and corporate earnings as actions begin to speak louder than words.
Federal Reserve Raises Key Interest Rate 0.25%
In a well-telegraphed policy move Wednesday, the Federal Reserve raised the fed funds rate by 0.25% to a range of 1.75% to 2.00%. The committee also signaled the potential for two additional hikes by year’s end—an increase from earlier expectations—a sign of their improved outlook on economic growth. In a post-meeting press conference, Fed Chairman Jerome Powell said it simply and succinctly: “[T]he U.S. economy is in great shape.”
We share the Fed’s view. Like Powell and his colleagues, we’re mindful that the trajectory is one of positive growth lifting most (if not all) business boats. Higher prices (inflation) don’t pose a threat yet, and policymakers remain calm and deliberate. The combination of full employment and a lack of skilled labor is pushing wages higher, which is in turn increasing prices for a broad selection of goods and services, and hence we are mindful that inflation may assert itself more strongly in the months ahead. If so, stocks have often been one of the best assets for investors looking to combat inflation’s force.
U.S. Economic Strength Persists: Consumer/Producer Prices Rise
With the economy continuing to expand, the Fed had every reason to hike interest rates.
Consumer prices are up 2.8% over the last year, while producer prices are up 3.1%. This means there’s some pricing pressure starting in the early stages of the production pipeline. But higher prices haven’t slowed consumer spending. Retail sales expanded at the fastest rate in six months in May. In a show of confidence, spending at restaurants and bars showed the biggest gains since January 2017. As goes the consumer, so goes our economy, which so far appears to be building momentum in the second quarter.
All that consumer spending has small business owners feeling more optimistic than they’ve been in 30 years. Expectations for business growth and positive earnings trends hit record highs in May. Small-business heads find it difficult to hire qualified workers, and as a result, reported the highest level of compensation increases in the 45-year history of the National Federation of Independent Business monthly survey—another “growth” problem.
The news from overseas was not as robust, however. Economic reports from Europe and China disappointed and continued to diverge from the U.S.
Looking Ahead: Key Housing, Manufacturing & Service Sector Reports
Next week brings reads on homebuilders’ confidence, new home construction, building permits, existing home sales, leading indicators and reports on manufacturing and the service sector.
Please note: This update was prepared on Friday, June 15, 2018, prior to the market’s close.
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