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Week in Review

Week Ending: Friday, July 6, 2018

Recap & Commentary

Markets ended the holiday-shortened week higher as investors temporarily shrugged off concerns about the burgeoning trade war. Friday’s stronger than expected U.S. employment report contributed to the narrative that, despite the doom-and-gloom of headlines, economic fundamentals remain strong.

On Friday, the U.S. moved forward with enacting tariffs on $34B of Chinese imports while threatening to increase the number by $200B should China retaliate. China immediately did so, by imposing a similar 25% tariff on 545 U.S. products, also worth $34B. Separately Canada imposed tariffs on $13B of U.S. goods and the EU threatened to impose tariffs on $300B of American goods should the U.S. follow through on threats to place large import tariffs on European automobiles.

The Federal Reserve released the minutes from its most recent Federal Open Market Committee (FOMC) meeting held in mid-June. The minutes were generally upbeat with respect to the economy but sounded a note of caution regarding current trade policy. FOMC members currently view economic activity as “solid” but noted that “uncertainty and risks associated with trade policy had intensified” and could lead to “negative effects on business sentiment and investment spending.” The committee also noted that at the current rate of increases, the federal funds rate could be at or above their estimates of its neutral level sometime next year.

Economic Bullet Points

Manufacturing— Activity accelerated for the second straight month according to both the ISM and PMI Manufacturing indexes due largely to manufactures hustling to move goods ahead of threatened tariffs. This haste has led to long delays in supplier deliveries—which also provided a boost to June data—as businesses struggled to book transportation amid a trucking shortage.  Many companies were forced to pay premiums in order to keep shipments moving. Overall, interestingly, demand is exceeding available capacity in most modes of transportation by a significant amount, and economists expect the trend to continue through year-end.

Services— Activity across US services industries and other sectors also accelerated for the second consecutive month as demand strengthened heading into the summer months. Some companies, however, are struggling to meet this demand due to logistical problems and shortages of skilled workers in some industries. According to the ISM non-manufacturing index, of the 18 industries tracked, 17 booked growth, led by the mining and construction industries.

Employment— US employment posted strong results in June as nonfarm payrolls increased by a stronger than expected 213K in response to brisk economic growth and a robust of new entrants into the workforce year to date. Regarding new entrants, the aggregate US workforce has grown by an average of ~250K workers each month this year—the best six month stretch in two years. This movement has played a role in the unemployment rate increasing from 3.8% to 4.0% in June, while concurrently increasing the participation rate from 0.2% to 62.9%. Furthermore, the robust increase in people looking for work has reduced wage inflation pressures/concerns and has given the Fed some breathing room as it relates to monetary policy.

Of Note

  • The 2-10 spread, a common measure of the slope of the yield curve, fell below 0.30% for the first time since Aug. 2007. Economists continue to debate whether the flattening curve is portending slower economic growth, or being distorted by non-fundamental factors such as highly accommodative global monetary policy.

Market Indices Week of 7/06

S&P 500                    -0.2%

Russell 2000             -1.3%

MSCI EAFE              -0.4%

MSCI EM                    0.2%

Commodities            0.5%

Barclay’s Agg.           -0.4%

US Dollar Index        -0.6%

10-Yr Yield                  2.41%

Oil ($/bl)                         $57

Gold ($/oz)                 $1,284

The Week Ahead

  • Consumer Credit
  • NFIB Small Business Optimism Index
  • Producer Price Index
  • Consumer Price index
  • Consumer Sentiment
  • Jobless Claims

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