There are only 10 more days left of summer 2019, and just like the weather it seems that trade tensions are cooling off.
Ahead of expected talks between China and the United States next month, both sides have taken steps to de-escalate a trade dispute that has lasted more than a year and helped cause widespread worry about global economic growth.
President Trump announced the White House will delay a tariff increase from 25% to 30% on $250 billion of goods made in China to Oct. 15 from Oct. 1, calling it a “gesture of goodwill.”
The optimism on the trade front has continued into this morning, after President Trump said Thursday he would consider an interim trade deal, although that wouldn’t be his first choice. And China said it will exempt U.S. soybeans, pork and other farm products from additional tariffs.
While it seems encouraging that there’s an apparent easing of trade tensions ahead of talks between the world’s two largest economies next month, the two sides still haven’t come to a definitive agreement. So any optimism might be tempered with a little caution. We’ve been down this road a number of times during these trade negotiations, with apparent progress followed by another breakdown. Still, the markets seem to be viewing the latest round as a step forward.
Records in Sight
The trade issue has arguably been the biggest overhang on Wall Street. Despite the recent positive tone, we’re far from out of the woods, and the issue could continue to be a headwind for stocks. Still, one positive sign could be the S&P 500 Index having broken out above 3000 for the first time since early August. For the first time in weeks, the major indices look to be within striking distance of all-time highs.
The positive sentiment comes after U.S. stocks notched another up day on Thursday, driven by developments on the trade front and by economic news from across the pond.
Doves Fly in Europe
Investors cheered the European Central Bank’s decision to lower its deposit rate by 10 basis points and launch new quantitative easing where it will make 20 billion euros a month of asset purchases basically for as long as it sees necessary to stimulate Europe’s tepid economy.
The European action comes on the heels of China’s efforts last week to stimulate its economy by lowering the amount of cash banks have to keep on hand as reserves.
In economic data this morning, retail sales for August rose 0.4%, beating a Briefing.com consensus that had expected a 0.2% gain. But stripping out auto sales left the figure unchanged when a Briefing.com consensus had expected a 0.2% rise ex-auto. The retail data seem to show that, despite recent headwinds, the U.S. consumer has still been driving the economy forward.
Next week’s economic calendar includes data on industrial production, housing starts and building permits, and existing home sales. Additionally, the Fed is scheduled to hold a rate setting meeting next week, with a decision expected on Wednesday afternoon.
FIGURE 1: CRUDE’S VOLATILE DOWNTREND. After making its 2019 high above $66 per barrel in April, crude oil futures prices (/CL) have been trending down—with periods of volatility—and chopping around the mid-50s since August. This week there's been some pressure from concerns about demand for oil amid a prolonged trade war, as well as worries about oversupply as OPEC and its allies failed to reach a decision on further supply cuts. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Fed Watch: Based on the futures market, it seems that Wall Street has accepted that there will probably only be a 25-basis-point rate cut from the Fed next week. As of this morning, there was an 86.5% probability of such a move with the balance of probability set on the Fed standing pat. Last month, probabilities included chances that the Fed would be more aggressive and slash its key short-term rate by 50 basis points. While such a move might be cheered by the stock market, it’s also arguable that such an aggressive move by the Fed isn't necessary because the U.S. economy seems to be humming along. Also, the latest consumer inflation data show there's upward pressure on inflation, which would tend to be a time for holding rates steady—or even raising them—rather than cutting them.
Inflation Rises: The data in reference—the core U.S. consumer price index for August—showed a gain of 0.3%, which was ahead of the Briefing.com consensus of a 0.1% rise. On a yearly basis, the core reading, which strips out food and energy, rose to 2.4% from 2.2% in July. While the Fed’s preferred inflation gauge is the core personal consumption expenditure price index, the core CPI reading is substantially above the central bank’s target rate of 2% annual inflation. “The key takeaway from the report is that it shows budding inflation pressure in core CPI that is apt to keep policy hawks at the Fed squawking about not needing to be overly aggressive with rate cuts at this time,” according to Briefing.com. It could be interesting to see if the core PCE price index for August, due out later this month, will also show a reading above 2%.
Labor Tightness: In addition to inflation data, a report on claims for unemployment benefits showed there is continued tightness in the U.S. labor market. That seems to be a sign of health in the economy and can also add to inflationary pressure as employers hike wages to attract workers. In fact, the Fed’s most recent Beige Book also noted that labor-market tightness continued to hamstring business activity growth and that there was strong upward pressure on pay for entry-level, low-skill, technology, construction, and some professional services workers.
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