Tariff Tension Eases – July 6, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Tariff Tension Eases

The key to this week’s turnaround in stocks came when Angela Merkel said she’d back cuts to EU tariffs on various American imports. This gave traders some confidence that Trump may win the war on trade – and bring back some US jobs in the process. It’s still too early to draw any firm conclusions in that regard, but Merkel’s statement is at least an acknowledgment of unfair trade policies that have long victimized the US. I would also think that her statement alleviates some pressure on Trump, who up until this point has been portrayed as the mercurial, unjustified aggressor in these matters. Parenthetically, the EU levies a 10% tax on US auto imports, while the US applies only a 2% tax on European autos. In any case, this development seemed to more than offset the escalating trade spat with China, and the indices managed to gain some bullish momentum throughout the week. They finished on Friday with a decent rally, led by the NASDAQ as the Alzheimer’s drug from Biogen Inc. showed positive results in a large clinical trial.

The economic information released was a non-event, though Friday’s non-farm payrolls (NFP) report received the usual hype (more on this in a moment). The ISM manufacturing data showed an uptick to 60.2 from 58.7 for May, though I couldn’t find a reason why. All the components within the index had hardly changed. May durable goods orders of -0.4% were psychologically neutralized by a 0.4% increase in factory orders for the same month. Wards showed that vehicle sales managed to gain a little traction in June, rising 3.39% to a 17.38 million annual run rate. Again, despite all the hype about the economy and moonshots, this level of vehicle sales hasn’t changed materially for at least 3.5 years. And of course, the NFP report registered a better-than-expected 213,000 (vs. 195,000), along with a slight increase in both the unemployment rate (at 4.0%) and the labor force participation rate (at 62.9%) – which no one seemed to care about. To put the NFP figure in perspective, it’s still significantly below peak levels reached around the beginning of the year when consumer spending was hottest following the three hurricanes.

Away from all of that, Treasuries, along with global fixed income, strengthened as trade tensions eased. Still, the yield curve spread between the 2- and 10-year Treasuries narrowed 5bps to 28.0 without much ado from Wall Street. Oil hovered near interim peak levels as geopolitically driven supply constraints in Iran and Venezuela trumped global trade tensions. The strength in stocks reduced the appeal of the safe-haven US dollar, and its weakness may have helped the metals recover from an earlier week decline – led by platinum in response to Trump’s proposed 20% EU auto tariff. Next week, we have Trump at the NATO summit, the announcement of his Court pick, and another look at US inflation data (PPI and CPI).

Best Regards,

David Burgess
VP Investment Management
MWM LLC

2018-07-06T21:01:41+00:00

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