Wall Street Continues Digesting Trade News, Assessing Expectations for Fed

Arguably, the biggest issue for investors is the trade dispute between the United States and China, which entered another phase yesterday as President Trump announced that the United States would slap a 10% tariff on $300 billion in Chinese goods starting Sept. 1.

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6 min read
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Key Takeaways

  • Nonfarm payrolls data come in close to expectations

  • Exxon beats on top, bottom lines

  • Investors seek havens as VIX ratchets up on Trump’s trade threat Thursday

(Friday Market Open) It’s Employment Report day, a day that often marks the biggest economic news of the month. This time around, however, the report might get the bronze medal, behind the Fed meeting and yesterday’s tariff bombshell. For the most part, the jobs report fell in line with expectations (see more below).

Arguably, the biggest issue for investors the trade dispute between the United States and China, which entered another phase yesterday as President Trump announced that the United States would slap a 10% tariff on $300 billion in Chinese goods starting Sept. 1.

Trade War, Fed Expectations, Jobs Report

It seems that market participants are in need of resetting their expectations about a potential resolution to the trade war because that cloud may not dissipate for some time. Wild swings based on the latest developments may need to give way to a calmer approach that accepts the trade tension as a fact of life for a longer period of time than people were hoping. 

Another issue the market may need to adjust its expectations about is the Fed’s monetary policy stance. Investors have been worried that this week’s rate cut may be a one-and-done type event rather than the beginning of a prolonged rate-cutting cycle.

In inflation-related news this morning, a government report showed that average hourly earnings, a key component of costs for businesses, rose 0.3% in July, matching a Briefing.com consensus expectation. The headline nonfarm payrolls number showed jobs growth of 164,000 during the month, slightly ahead of a Briefing.com consensus that was projecting that 160,000 jobs would be created in July. 

Even though Fed Chairman Jerome Powell earlier in the week tried to walk back initial comments that many interpreted as him saying this week’s cut was a one-and-done easing, he also said the Fed’s rate-setting committee doesn’t see the economy being in a position where the Fed funds rate needs to be cut a lot. He even referenced the possibility that rates could go back up at some point. Also, two voters at the committee this week voted against the decision, meaning further easing likely faces strong opposition.

That leaves market participants trying to sort out their expectations of the Fed’s path on interest rates for the rest of the year. In times of uncertainty like this where the market is in the process of trying to gain clarity on big issues, choppiness can be a fact of life. 

Markets Wrap

It certainly was on Thursday, when the Cboe Volatility Index (VIX) surged more than 10% in a sign of investor anxiety being on the rise amid escalating trade war rhetoric during the first trading day of August, which historically hasn’t been a kind month for the stock market. 

Trump’s announcement put investors on edge and sent them into the relative safety of government debt, with the yield on the 10-year Treasury falling to its lowest point since 2016 as all three of the main U.S. indices slumped markedly, with the Dow Jones Industrial Average ($DJI) falling more than 1%.

With the decline in yields, the S&P 500 Index (SPX) Financials sector was the day’s biggest loser, as banks tend to not do as well when longer-term yields falter. Meanwhile, the Energy sector was the second-worst performer as oil prices dropped sharply after Trump’s announcement. Traders and investors appeared to fret that a prolonged trade war would further dent the global economy and weaken demand for black gold. 

In other energy news, Exxon Mobil (XOM) reported earnings and revenue that beat Wall Street expectations. It marks yet another company that has beaten expectations as this earnings season rolls along. However, in general those expectations may have been on the low side.

Investors flocked to gold on Thursday as a perceived safe haven, with weaker Treasury yields also helping the metal. Because gold doesn’t earn interest, lower interest on government debt can make the metal more attractive. 

Figure 1: VIX FIX.The market’s main fear gauge, the Cboe Volatility Index (VIX - candlestick) jumped more than 10% yesterday as worries about global economic growth ratcheted up as Trump threatened more tariffs on Chinese goods.The uptick in fear coincided with flight to the relative safety of U.S. Treasuries, which sent the yield on the 10-year (TNX - purple line) below 1.9%. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Utilities Glow: In one of the few bright spots in equities on Thursday, the slump in Treasury yields helped the Utilities sector rise more than 1%. Companies in the sector are often bought for their history of issuing strong dividends, making them a bond proxy that becomes more attractive when interest rates on government debt falls. The sector is also considered to be a defensive one, and investors may have been seeking solace there as other types of stocks fell. The sector also appears to have a tail wind from the Fed’s rate cut. “Low interest rates are a substantial positive for utilities and a key reason they are trading at historically high levels,” according to Morningstar equity analyst Travis Miller. “Utilities were the most overvalued sector in our entire equity coverage universe, and the big reason is low interest rates have lowered utilities’ borrowing costs and made their dividends more attractive for yield-seeking investors.”

Copper Tarnished: One of the world’s key industrial metals is sometimes referred to as Dr. Copper, as if it had an advanced economics degree. That’s because it is so widely used in broad swaths of the economy, including construction and equipment manufacturing, that its price is often seen as a leading indicator. Dr. Copper seems to be telegraphing economic uncertainty even as its precious metal counterpart, gold, is being used by investors to assuage some of that uncertainty as a safe haven. Copper futures have taken a hit as Trump’s threat of more tariffs ratchets up worries about the global economy. That’s even as data released Thursday showed manufacturing in China, the world’s biggest copper consumer, remains in a contraction and manufacturing growth in the United States has slowed.

What He Said: Going into the Fed meeting earlier this week, it became apparent that Fed Chairman Jerome Powell was in a situation where it seemed nothing he said would please people. That turned out to be exactly the case, as stocks dived right in the middle of his press conference after he led investors to believe the rate cut might be a one and done. He tried to walk that back, but no matter what he says, it’s hard to walk the line the market wants to hear. Powell arguably also might have left some investors confused about where the Fed stands on future action, saying at times that he could see more cuts but also at one point saying there could be another hike.

At this point, it might be worth asking if Powell is reconsidering the wisdom of having a press conference after every meeting. Remember, that only started this year. The practice over the last decade since post-meeting press conferences began was to only have them once a quarter, not every meeting. The market’s press-conference crumble this time around wasn’t the first time Powell’s comments appeared to weigh on the market. Visibility and openness are good, and it’s worth getting a sense of the Fed chair’s thoughts, but is it needed every meeting? 

Good Trading,

JJ 

@TDAJJKinahan 

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Economic calendar for week of July 29. Source: Briefing.com

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Key Takeaways

  • Nonfarm payrolls data come in close to expectations

  • Exxon beats on top, bottom lines

  • Investors seek havens as VIX ratchets up on Trump’s trade threat Thursday

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