Economic Update 5-13-2019

• Economic data for the week included ongoing mixed to lower reports for producer and consumer inflation, little changed conditions but lower demand for bank loans, and continued positive jobs markets and claims data.
• Equities fell across the globe last week, due to threats and eventual implementation of U.S.-China tariffs. Government bonds fared well as flows moved away from risk, while credit lagged a bit. Commodities were mixed to lower, with little change in either the dollar or crude oil prices.

U.S. stocks experienced a negative week (which continues this morning), as hopes for a U.S.-China trade deal in the works for months deteriorated and, by Friday, implementation of additional tariffs following a pre-set deadline. Fears of China backing out of a deal continued to put pressure on equity markets, where the technicals were seen as a bit extended by some during recent weeks. It was apparent that almost all equity sentiment for the week was driven by the tariff issue, which resulted in the removal of the market’s premium of an assumed completed trade deal to some degree.

Specifically, the week had started poorly as tweets over the prior weekend from the President regarding frustration with progress in the U.S.-China trade negotiations pointed to tariff rate increases taking effect ‘shortly’ (which alluded to the previously-set deadline of May 10). This was in regard to the second $200 bil. tranche of goods being upped from 10% to 25% (the relatively minor first tranche at a tariff rate of 25% affecting $16 bil. of goods went into effect last summer).

Despite the negative headlines during the week, there appears to still be a window of time for a deal to be hashed out, alluded to by Treasury Secretary Mnuchin, stating that talks were continuing with progress being made. The disconnect between macro policy and micro logistics were perhaps best exemplified by analysts reviewing the approximate 2-3 week period of a cargo ship’s transit time from China to the U.S. for potential impacts, as tariffs would not technically apply to goods already en route. Assuming this second tranche remains in effect for now, this would leave the final tranche of $300 bil. in Chinese exports under threat, with an announcement that ‘paperwork is being drafted’ to begin the process of implementing tariffs here as well, but this could take time and leaves room for a deal in the meantime. While it’s certainly likely the tariff impositions are a negotiating tactic, it remains to be seen how much disruption and uncertainty will affect markets in the interim.

Every sector of the S&P ended in the negative, with traditionally defensive staples ending the week strongest, with minimal losses, along with energy; while technology, industrials and materials brought up the rear all losing near or more than -2.5%. The Russell 2000 small cap group actually tipped back into a -10% correction slightly, measured from last summer’s highs.

Foreign stocks in Europe and the U.K. fell in similar fashion to U.S. equities, while Japan fared a bit worse, due to tighter trade relations with China, and emerging markets declined by up to -5%, led by more severe declines in China and South Korea, which are naturally both heavily immersed in the zone of trade tensions. Other regions, such as Latin America, suffered losses on par with developed market equities.

U.S. bonds fared well, as expected, with flows moving away from risk assets, which pushed fixed income prices higher and yields lower. The yield curve is showing a pronounced inversion between the 3 month Treasury bill and 2-5 year note, before turning positive again going out toward 10 to 30 years. This is in keeping with continued higher market probabilities of a downturn in the next several years. For the week, Treasuries fared best, followed by investment-grade corporates up a few basis points, while floating rate and high yield lost up to a half-percent on the week. Foreign bonds performed similarly, with little change in the dollar to move the needle, as developed market treasuries gained ground, while emerging market local and USD-denominated bonds both declined on the week.

Real estate fared better than broader equity markets, declining only by about a percent. International fared better, actually experiencing a gain for the week as interest rates remained contained, and REITs being seen as a bit of a safe haven away trade-related concerns directly.

Commodities were mixed, with gains in precious metals due to movements away from risk in financial markets, while agriculture and industrial metals suffered due to the perceived demand implications of a longer-than-expected trade war. The price of crude oil bounced around in a trading range during the week, closing down a half-percent on net to just under $62/barrel. The Iranian output/waiver and intensification of tensions and offsetting impact of higher U.S. output has taken a backseat to global sentiment surrounding U.S.-China trade.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.