BMA Market Insights: Trading Riffs


The tit-for-tat U.S.-China trade war is leaving investors sensitive to political and economic data. In pre-market trading, U.S. equity futures reversed gains as ongoing protests in Hong Kong begin visible impacts to corporates such as Cathay Pacific amongst other airlines. A self-fulfilling prophecy is evident in current financial market conditions as lower business sentiment and supply chain constraints are increasing investor appetite to safe-haven assets such as gold, the Japanese Yen, and government bonds. The spread between the 2-year and 10-year U.S. Treasury is currently 9bps (an economic recession has, historically, followed a negative spread), 18bps lower from a year ago.

Last week, after investors were elated from the Fed’s first rate cut since the 2008 global recession, U.S.-Sino trade relations took a nosedive as President Trump announced that, effectively, all Chinese imports would be levied by an additional 10%. Without missing a beat, the People’s Bank of China devalued the Chinese yuan to exceed 7-to-the-dollar. The U.S. fired back by labeling China a currency manipulator (However, the International Monetary Fund commented, the charge is without merit at this particular moment). The president took the added step of directing the entire U.S. government to no longer do business with Huawei, a Chinese telecommunications company. China, in response, announced that state-owned enterprises will refrain from buying any American agricultural products going forward.

It was not a horrible close to the (roller coaster) week on Wall Street, considering last Monday’s nosedive on trade fears. The Dow Jones Industrial Average closed down 0.70% at 26,287.44 while the S&P 500 dipped 0.5% to 2,918.65 and the Nasdaq Composite pulled back 0.6% to 7,959.14.

The 10-year U.S. Treasury note’s yield hovered above 1.7% at the end of the week while that of the 30-year Treasury bond dipped to around 2.223%. These declining rates reflect fears that the trade war is not ending soon, and puts the entire economic cycle at risk, but they did ricochet off the multiyear lows they saw on Wednesday.

This same uncertainty fueled the gold market, which saw its best week in three years. Prices rose around $50 per ounce over the course of the week, and the London spot market was trading above $1,500 throughout the weekend, a threshold was last seen in April 2013. U.S. West Texas Intermediate crude futures settle at $54.50 per barrel, down slightly for the week. If oil seemed insulated from the same dynamics that affected the stock, bond and gold markets, that would be due to reports that OPEC might soon be gutting the market of inventory.

I.   U.S. Economic Data/Markets

  • IHS Markit’s Purchasing Manager Index posted a 50.4 July reading, slightly better than forecasts and still indicative of at least mild economic expansion, but still the lowest reading of this manufacturing sector health check since September 2009.
  • The IBD/TIPP Economic Optimism Index slipped 1.5 points to 55.1 in the past month. While any reading over 50 signals optimism, some analysts note that President Trump did not instigate the next trade war battle until the last day of the survey; they expect a lower number from the next reading.
  • Job openings slipped 36,000 to a seasonally adjusted 7.3 million in June, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey (JOLTS). Some say this represents an inflection point, as the JOLTS number had been plateaued near a record high since late last year. The Labor Department also reported that initial claims for state unemployment benefits dipped 8,000 to a seasonally adjusted 209,000 last week, suggesting that the job market remains tight.
  • Employers added 164,000 jobs in July, while wages rose 3.2% year-over-year. Job growth was slightly below forecasts, wage growth slightly above. According to ADP, 156,000 of those new The Institute for Supply Management’s index of national factory activity slipped to 51.2 in July, the lowest reading in almost three years and its fourth straight monthly decline. Although this indicates a slowing of manufacturing growth, any reading over 50 still signals expansion.
  • The Labor Department also announced its producer price index rose 0.2% last month, in line with expectations and suggesting that inflation is well-contained.
  • The Federal Reserve reports that consumer credit increased by $14.6 billion in June, below the $16 billion expectation. This suggests that, while Americans are still spending, they are easing up on spending money they do not have on hand.
  • The Census Bureau reported that wholesale inventories were unchanged in June, as was the related inventory-to-sales ratio. A spike in the ratio is a recessionary signal.

II.  Trade

US dollar-denominated exports in July rose 3.3% year-over-year with imports falling 5.6%, according to the General Administration of Customs of China, beating expectations. China’s overall trade surplus in July was $45.1 billion, up 63.9% year-over-year. These numbers suggest that China’s trade position is far more resilient than many — including those setting U.S. export-import policy — believe.

III.  Economics Outside the U.S.

  • Chinese Economy
    • Caixin/Markit’s July manufacturing purchasing managers’ index reached a better-than-expected 49.9. June’s reading was at 49.4. Still, the metric has now been below 50 for two consecutive months, indicating a contraction in manufacturing activity.
    • Food cost jumped 9.1% year-over-year, according to the National Bureau of Statistics showed on Friday. An epidemic of African swine fever caused the price of pork to spike.
  • Eurozone Economy
    • PMI dropped to 46.5 in July, contracting at the fastest rate since 2012.
    • Germany’s June trade balance came in at €16.8 billion ($19.0 billion), a disappointment compared to forecasts. While this is not favorable news, it is not all bad in that it signals Europe’s largest national economy is strong enough to have an increased appetite for imports.
  • U.K. Economy
    • Second-quarter GDP dropped 0.2% according to the Office for National Statistics (ONS), the first contraction in seven years. If this occurs again during the third quarter, the British economy would be by definition in a recession.
    • The trade deficit fell £16.0 billion ($19.3 billion) to £4.3 billion in the second quarter of 2019 mainly due to falling imports of goods, according to ONS.
    • House prices dropped by more than expected in July, according to the Royal Institution of Chartered Surveyors (Rics), amid concerns stemming from the increasingly likely prospect of a no-deal Brexit. The Rics house prices balance, which measures the sentiment of realty professionals, dropped to -9% in July from June’s -1% reading.
    • Car sales dropped for the fifth consecutive month, with new vehicle registrations down by 4.1% to 157,198. The July reading was the weakest since 2012, according to the Society of Motor Manufacturers and Traders.
  • Canadian Economy
    • PMI registered 50.2 in July, up from 49.2 in June and above the 50.0 no-change value for the first time since March. A lower fall in output and a rise in pre-production inventories were the main factors pushing the headline PMI into positive territory in July. Data revealed a slight reduction in manufacturing output, but the rate of decline eased markedly from the three-and-a-half-year low seen in June. New orders were also more stable in July, as sales dropped at the slowest rate since March.
    • Following a long period of rapid escalation, housing prices are now down 2.5% year-over-year.
    • Housing starts fell 9.6% last month to an annualized 222,013 units, according to Canada Mortgage and Housing Corp., but still beat forecasts. Multifamily starts plunged 12%. Meantime, housing permits were lower by 3.7%.
    • Wages grew 4.5% in July, the fastest rate in 10 years, according to Statistics Canada. Still, that contrasts sharply with the loss of 24,200 jobs, which pushed the unemployment up to 5.7%.
  • Japanese Economy
    • GDP grew at an annualized 1.8% in the second quarter, beating expectations.
    • Central bankers’ opinions were mixed regarding the economic outlook in light of global risks. Some Bank of Japan policymakers want to loosen monetary policy as soon as next month while others argued that any immediate stimulus would but too great a strain on financial institutions.
    • Japan’s current account surplus shrank 4.2% to ¥10.47 trillion ($98.73 billion) in the first half as exports to Asia turned sluggish, according to the Finance Ministry. The goods surplus plummeted 87.4% to ¥224.2 billion as exports of chip-making equipment to South Korea and of steel and auto parts to China fell sharply.
    • Household spending increased for the seventh straight month, rising 2.7% in June to JPY ¥276,882, according to the Ministry of Internal Affairs and Communications. Outlays for leisure was the primary driver, with purchases of package tours in advance of Japan’s three-day mid-August weekend.
    • Average cash earnings gained 0.4%, far exceeding expectations.
    • Leading economic indicators were up 93.3%, slightly below forecasts.

Key data/events this week:

  • Monday
    • U.S. federal budget statement
    • U.S. consumer inflation expectations
    • China vehicle sales
    • Japan PPI
  • Tuesday
    • U.S. inflation
    • U.S. business optimism
    • China industrial production
    • China fixed-asset investment
    • China retail sales
    • Eurozone economic sentiment
    • Germany inflation
    • Germany wholesale prices
    • Japan machine tool orders
    • U.K. unemployment
    • U.K. average earnings
    • U.K. labor productivity
  • Wednesday
    • U.S. import and export prices
    • China M2
    • China lending
    • Eurozone GDP growth
    • Eurozone industrial production
    • Eurozone employment change
    • U.K. inflation
    • U.K. PPI
  • Thursday
    • U.S. retail sales
    • U.S. labor costs
    • U.S. non-farm productivity
    • U.S. industrial production
    • U.S. capacity utilization
    • U.S. business inventories
    • Japan industrial production
    • Japan capacity utilization
    • U.K. retail sales
    • Canada employment change
    • Canada new vehicles
  • Friday
    • U.S. housing starts and building permits
    • U.S. Michigan consumer sentiment
    • China FDI
    • Eurozone balance of trade
  • NOTE: No Federal Reserve governor speeches are scheduled for the week of August 12.