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Accelerating trade rhetoric largely ignored by investors

SEP. 17, 2018
  • Equity markets returned to rally mode following a brief stall in the previous week, with the S&P 500 Index now gaining in 9 of the last 11 weeks and closing very close to an all-time high. Investor attention was drawn to the strength of the economic data, with less focus on the potential escalation of the trade war.
  • Last week was another example of how “hard” data is beginning to catch up to soft data. For the consumer, we had an improvement in consumer sentiment, with the second-best reading since 2004 and the expectations reading in the report at the best level since 2004. We also saw retail sales rise to the best year-over-year level since the financial crisis. For businesses, we saw small business optimism rise to a record high of 108.8, with specific optimism on the outlook for the economy and capex spending. We also saw industrial production accelerate to 4.9% annual growth. Several months ago, we noted that soft data (i.e. survey-based readings on optimism) was strong, but we didn’t see it in the hard data (i.e. readings of activity). Recently, they have begun to converge, which is encouraging.
  • International economic growth continues to be more mixed than the U.S. The ECB met, choosing to keep policy unchanged, and dropped growth estimates to 2.0% from 2.1% for 2018 and to 1.8% from 1.9% for 2019. Japan had better-than-expected readings on manufacturing and non-manufacturing demand. Also, China reversed the recent slowdown, with improvement in retail sales and industrial production last week and home values this morning.


The Trump administration is set to announce new tariffs on up to $200 billion in Chinese goods, but plans to start with 10% rather than the 25% previously discussed. Talks had been scheduled for later this month, but there are reports that Chinese officials are considering skipping the meeting and restricting sales of materials and equipment to U.S. manufacturers as retaliation. There is little reaction in the futures market resulting from this information.


As the Fed prepares to meet at the end of the month, the Fed Futures market has embedded a near-100% chance of a hike, and an 80% chance of an additional hike at the December meeting. Two of the historic doves, Brainard and Rosengren, appeared to go modestly more hawkish last week, while most economic data points have accelerated. A complicating factor may be the impact of the hurricane, though it is too early to tell the economic impact. This caused a continued flattening of the yield curve, with the spread between the 10-year and 2-year to fall to a cycle-low of 0.19% last week before bouncing a bit this morning.


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