Trade Headwinds Again: Second Half Starts On a Rocky Note

Market sentiment was once again overshadowed by negativity surrounding global trade as Wall Street appeared set to open the first trading day of the second half of the year on the back foot.

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(Monday Market Open) Market sentiment was once again overshadowed by negativity surrounding global trade as Wall Street appeared set to open the first trading day of the second half of the year on the back foot.

Tariffs and Retaliatory Tariffs

The pessimism comes after President Trump talked up a threat to impose global auto tariffs and an Axios report stated the administration had drafted a bill that would allow the White House to raise tariffs without congressional consent. U.S. goods could face $300 billion in new tariffs from the European Union if Trump implements threatened duties against EU automakers, the Financial Times reported. Meanwhile, Asian stocks fell sharply. Tariffs from China and the U.S. are scheduled to take effect at the end of this week. Canada on Friday announced billions of dollars in retaliatory tariffs on more than 200 U.S. products. Those tariffs went into effect Sunday.

Crude oil also started the second half of the year on a negative note after Trump tweeted that Saudi Arabia could raise production. However, today’s moves comes against a backdrop of crude being up sharply in recent weeks.

Positive End to Q2

U.S. stocks ended last week and the first half of the year on an upbeat note with the three major indices in the green for the day. But they were down on the week.

Before selling off later in the day Friday, bank stocks had been higher after largely positive results from the second part of the Federal Reserve’s stress tests. After the tests were completed, some banks that were deemed adequately capitalized said they would raise dividends and buybacks.

On Friday, Nike (NKE) shares gained more than 11% after the shoe and apparel giant reported stronger-than-expected earnings and revenue and said it had returned to sales gains in North America. The company also announced a $15 billion stock buyback plan, to be completed within its fiscal 2019.

Holiday Week and Jobs Data

With U.S. markets closed for the Independence Day holiday on Wednesday, and some perhaps taking off other days this week, trading could be light. Plus, with the monthly employment report set to be released on Friday morning (see figure 1 below), some traders tend to lighten their positions ahead of the number, then settle in and wait for the data before re-initiating positions. It may be worth keeping in mind that thin trading can heighten volatility, exacerbating moves either to the upside or downside.

Figure 1: Civilian Unemployment Rate, 1946-2018. The market heads into Friday‘s release of employment data at one of the lowest points in the postwar period. Note the various peaks and troughs over the long cycles. Source: Federal Reserve‘s FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Jobs Report on Tap: Arguably the biggest piece of economic news the market will get this week is Friday’s jobs report. June non-farm payrolls are expected to show a gain of 195,000, according to economists polled by Briefing.com. The unemployment rate is expected to come in at 3.8%, which would be unchanged from last month. This report can move the market if it comes in with a big miss to the upside or downside. Investors watching these figures may also want to consider taking a look at average hourly earnings, which are also included in the report. Wages are an important part of the inflation outlook, and a big jump in wages because of the tight labor market could be viewed as reason for the Fed to get more hawkish on interest rates.

GDP for Q2: Second quarter gross domestic product looks like it may come in stronger than the readings for Q1 according to some related data recently released. The market won’t see the official advance estimate from the government until July 27. But it’s possible that the economy performed better in Q2 than the 2% annualized growth shown in the government’s third GDP estimate for Q1 released last week. Don’t forget, many companies reported Q1 slowness due to weather, potentially adversely affecting GDP. Consider the Institute for Supply Management’s manufacturing index, which rose to 58.7 in May from 57.3 in April, an indication of strong growth in manufacturing for the 21st month in a row. According to the ISM, the past relationship between the index and the overall economy indicates that the May reading corresponds to a 4.8% increase in annualized GDP growth. The June ISM manufacturing index reading is scheduled to be released this morning.

Consumer Spending: While 2Q GDP may come in higher than last quarter’s, Briefing.com said that forecasts could be tempered by last week’s data on consumer spending. Personal spending in May showed a 0.2% gain. That was lower than economists polled by Briefing.com had expected despite personal income rising by an as-expected 0.4%. Real personal consumption expenditures -- an inflation adjusted estimate that excludes the effects of price changes -- decreased less than 0.1%. “Real PCE was (essentially) flat, which is likely to prompt some downward revisions to Q2 GDP forecasts,” Briefing.com said. Still, the headline personal spending number does show growth, however slight. And the same report showed gains in the headline and core PCE price indexes. “The price indexes are moving in the direction anticipated by the Fed, which means the Fed is also likely to keep moving the fed funds rate higher as anticipated,” Briefing.com said. 

Good Trading, 

JJ

@TDAJJKinahan 

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This Week’s Economic Calendar. Source: Briefing.com
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