U.S. stocks dropped Thursday after President Donald Trump wrote in a Twitter post that the administration would be imposing 10% tariffs on $300 billion worth of Chinese imports at the beginning of September, following a round of trade talks earlier this week.
Here were the main moves in the market, as of market close:
Earlier in the session, stocks had begun to recover Wednesday’s losses after the Federal Reserve on Wednesday indicated it was not on a set path toward still-lower rates. The signaling had initially sent risk assets reeling as investors scrambled to recalibrate to the prospect of less accommodative monetary policy than previously expected.
Though the Federal Reserve delivered a 25 basis point rate cut, as expected, its members stopped short of promising further cuts in the near-term. Two members of the committee dissented with the decision to reduce rates, and favored keeping borrowing costs unchanged.
The monetary policy decision and subsequent remarks from Fed Chair Jerome Powell led many traders to characterize the policy move as a “hawkish cut.” After weeks of relatively low-volatility trading, the S&P 500 and Dow posted their largest drawdown since May, and the U.S. dollar surged. President Donald Trump, a vocal critic of the Fed under Powell who has repeatedly called for lower rates, weighed in with a Twitter post saying, “Powell let us down.”
Powell described the rate cut “as a mid-cycle adjustment, and markets are worried that means there isn’t much more easing coming,” Kit Juckes, global head of FX strategy at Societe Generale, wrote in a note. “Cue further equity market weakness and further dollar strength.”
Other economists, however, took the Fed’s noncommittal signaling as a strategic move to temper market expectations and provide a buffer for officials to remain data dependent in making their next decision after their September meeting.
Federal Reserve Chair Jerome Powell holds a news conference following the Federal Reserve's two-day Federal Open Market Committee Meeting in Washington, U.S., July 31, 2019. REUTERS/Sarah Silbiger
Wednesday’s “Fed events may have given risk markets a little indigestion, but they also bought the Fed a little more flexibility going into the next FOMC meeting,” JPMorgan economist Michael Feroli wrote in a note. “We still look for one more easing in September, and continue to believe that ... the call in September depends on all of the data. While [Wednesday’s] move was motivated by global growth, trade policy and inflation developments, we expect September’s decision will also depend on domestic growth developments.”
As of Thursday morning, markets priced in an about 50-50 probability of either a 25 basis point rate cut, or no change to key interest rates after the Fed’s September meeting, according to CME Group data. Futures markets showed participants leaning much more heavily toward a 25 basis point cut after Trump announced further tariffs on Chinese imports, however.
Economic data deluge
The first of the economic data releases ahead of the Fed’s next meeting came in mixed on Thursday, with new reports showing continued strength in the labor market and ongoing weakness in the manufacturing sector.
New unemployment claims edged up just slightly more-than-expected to 215,000 for the week ending July 27, according to government data. The four-week moving average, however, fell to 211,500, indicating ongoing tightness in the labor market. The Bureau of Labor Statistics releases its July jobs report Friday, on the heels of a stronger-than-expected report from the ADP/Moody’s survey on July’s private payrolls.
Meanwhile, U.S. manufacturing activity fell to the lowest level in a decade in July as anemic output increases and soft demand weighed on growth, according to a release Thursday from IHS Markit.
IHS Markit’s headline purchasing managers’ index (PMI) fell to 50.4 for the month, just a hair above the neutral 50 level to indicate expansion.
“U.S. manufacturing has entered its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter,” Chris Williamson, chief business economist at IHS Markit, said in a statement. “The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualized rate in excess of 3%.”
A separate survey from the Institute of Supply Management (ISM) pointed to similar weakness in the domestic manufacturing sector. The headline PMI from this report edged down to 51.2 for July, below consensus expectations for 52.0 and June’s reading of 51.7. ISM’s employment index dropped to 51.7 for the month, from 54.5 in June, and its price index fell further into contractionary territory at 45.1, from 47.9 previously.
Meanwhile, construction spending unexpectedly declined in June by 1.3%, the Commerce Department reported Thursday, marking the largest drop in seven months. Consensus economists expected construction spending to have increased 0.3% in June, after falling in May. May’s reading on construction spending was upwardly revised slightly, however, to see a shallower decrease of just 0.5%, from the 0.8% drop seen previously.
Earnings update
Second-quarter earnings season continues to chug along.
Health insurance giant Cigna (CI) topped Wall Street’s expectations in quarterly results released Thursday morning, and raised its annual revenue and earnings forecast. This came a day after competitor Humana (HUM) also posted strong results and raised guidance. Cigna’s results were led by an about 75% jump in quarterly profit, with health services revenue – the unit that includes the Express Scripts pharmacy benefits business it bought last year – surging over last year.
Auto company General Motors (GM) also exceeded expectations on both the top- and bottom-lines, with North American profits rising 11% over last year. Adjusted automotive free cash flow was positive $2.5 billion in the quarter, more than reversing a loss of $100 million in the year-ago quarter. Sales and profit from China declined, however, and the company said it expects unit sales in the region to remain weak as an economic slowdown continues in the region. GM reiterated its full-year guidance to see adjusted EPS of between $6.50 and $7.00.
As of Thursday morning, companies comprising more than three-quarters of the S&P 500’s market capitalization had reported second-quarter results. Earnings have so far beaten by 5.4%, with 69% of companies exceeding their bottom-line estimates, according to Credit Suisse analyst Jonathan Golub. Assuming a typical beat rate for the rest of the quarter, aggregate EPS is on pace to rise 3.4% over last year, Golub added.
Companies including Aphria (APHA), Pinterest (PINS), Square (SQ) and U.S. Steel (X) are slated to report quarterly results after market close.
