BMA Market Insights: Trade Talks Resume and Market Over-reacts


The news last week that the U.S. and China would resume in-person trade talks next month pushed both bond yields and global equity indices higher and trimmed expectations for additional interest rate cuts. We caution that investors take the media’s headline news lightly as any deal that involves the removal of tariffs before next year’s U.S. presidential election is unlikely. The question is whether we will see a further escalation in the trade war with progressively higher tariffs coupled with new global alliances or other non-tariff related strategies? Likely, both administrations will wait to see the respective domestic impact from the higher tariffs that are due to come throughout the rest of 2019.

U.S. Equity futures point to a higher opening this morning as the S&P 500 futures show a +0.3% open. Global bond yields continue to trend higher with the 10-year U.S. Treasury note trading 4.3bps higher to 1.594%. 

Last week, we saw August’s U.S. ISM Manufacturing fall to 49.1 from 51.2, only a month earlier. An index of more than 50 indicates expansion while a reading below 50 suggests a contraction in the manufacturing sector. This is the lowest reading since January 2016 and may suggest that the escalating U.S.-China trade tensions coupled with weakening global demand are beginning to take a toll on U.S. production. However, the ISM Non-Manufacturing index produced a healthy 56.4 in August, up from 53.7, suggesting that the U.S. economy continues to grow despite the trade war.

The employment report showed a slowdown in private job growth (+130,000) while partially offset by the hiring of 25,000 temporary census workers. The unemployment rate remained unchanged at 3.7%. Average hourly wages increased by 0.4% month-over-month or 3.2% annualized. The Fed may cite the slowing job growth as one of the reasons to cut rates by 25bps next week. 

In Europe this week, we have:

  • The U.K. Parliament may be suspended as soon as today (Monday), and a bill blocking Boris Johnson’s no-deal Brexit could become law. 
  • The European Central Bank (ECB) meets on Thursday and is expected to cut interest rates and update their view on quantitative easing.
    • The ECB is expected to publish forecasts for growth and inflation and hold a press conference post-meeting.

On the U.S. data front, we have the following reports: