Global Flight-To-Safety As Trade Pressure Mounts


Trade tensions took center stage last week. China and the U.S. continued their tit-for-tat levies on each other’s goods. Japanese/U.S. trade talks also emerged given the U.S.’s recent tariff threats on the automobile industry. Finally, U.S. relations with Turkey worsened as President Trump called for tariffs on steel and aluminum imports. 

The trade rhetoric with Turkey in part caused a selloff in the U.S. equity markets on Friday. Earlier in the week the S&P 500 was in striking distance of hitting its all-time high of 2872.87 (reached in January). More than three-quarters of the companies who reported their earnings, thus far, have outperformed market expectations. About 50 companies have yet to release their earnings. The index dropped about .25% over the week. 

The sell-off in equities caused a flight-to-quality trade towards less risky assets, and thus a rally in treasuries. The ten-year yield dropped about five basis points over the week and was trading near 2.873% on the close.

I. U.S. Economic Data

  • Core CPI rose in July – underpinning the Fed’s path to rate hikes. Core CPI rose 2.4% y-o-y in July, the largest rise since September 2008.
  • Weekly jobless claims unexpectedly fell – indicating that a robust U.S. economy continues regardless of trade tensions. Weekly claims came in at 213k versus 220k expected. 
  • Core PPI rose – for the second straight month in July while the overall index remained flat, underperforming market expectations and signaling relatively tame inflation. 
  • Fed Official Charles Evans shared hawkish comments, noting the economy’s “strong performance” in an interview last week with the expectation that inflation will near or move above the Fed’s 2% target. Evans also expected that GDP growth hover between 2.5%-3% next year. He sees a reasonable possibility of the Fed hiking two more times in 2018. 
  • Some economists increased 2018 growth forecasts on the back of increased government spending and tax cuts. A recent survey conducted by the Wall Street Journal suggested that the average estimate for growth in 2018 would be 3% compared to 2.4% a year ago. Growth expectations for 2019 were largely unchanged and 2020 lowered to 1.8%, down 20 basis points from earlier in the year – on the back of increased tariff concerns.

II. Trade Tensions

  • China threw the latest swing at the U.S., as it threatened to impose levies on about $16 billion of U.S. goods. The announcement came on the back of the U.S. listing Chinese products that will face 25% levies later this month, which will raise the value of tariffs to $50 billion from $34 billion.
    • China also threatened to target specific U.S. companies, such as Apple (who relies on China for about 20% of its revenues) on the back of rising tensions.
  • Japan and the U.S. met last week to discuss their trade relations with a focus on the agricultural and auto sectors. The talks come on the back of President Trump considering up to 25% of tariffs on autos and auto parts, which could significantly impact Japan given its role as a major car exporter. In 2017 the U.S. had its fourth largest trading deficit with Japan, after China, Mexico, and Germany.
  • Trade relations between Turkey and the U.S. worsened as President Trump authorized tariffs on aluminum and steel imports from Turkey. The lira dropped nearly 20% versus the U.S. dollar on the back of the announcement. Further, the ECB expressed concern over the impact of the lira on European banks, which also took a hit (regarding equities) on Friday.
  • U.S. announced new sanctions on Russia given the nerve agent attack in the U.K., causing the Russian ruble to fall the most since the 2015 oil shock. The first phase is expected to occur on August 22nd, where export licenses will be denied to Russia for the purchase of many items that have national security implications.
  • The World Trade Organization expects lower export orders and slower car sales to slow world trade growth in the third quarter in part due to escalating trade tensions worldwide. The WTO’s quarterly outlook indicator dipped to 100.3 from 101.8 (predicted in May) for the second quarter.

III. Other

  • Canada’s unemployment rate dropped to a four-decade low of 5.8% in July.
  • China’s trade surplus with the U.S. slightly narrowed in July, dropping to $28.08 billion, compared to a $28.97 billion surplus in June.
    • The growth of its exports to the U.S. slowed to 11% in July vs. 12.5% in June.
    • China’s exports to the U.S. rose 12.6% in June compared to a year ago.
  • Imports increased from 9% to 11%.

This week:

While June U.S. retail sales data and the Philadelphia Fed report will be a focus domestically, a slew of key overseas economic releases are expected throughout the week. 

Key data/events include:

  • German Q2 GDP (Tuesday)
  • GBP June Average Earnings (Tuesday)
  • EUR Q2 GDP (Tuesday)
  • GBP inflation data (Wednesday)
  • JPY trade data (Wednesday)
  • U.S. July retail sales (Wednesday)
  • U.S. Industrial Production (Wednesday)
  • AUD July employment data (Thursday)
  • U.S. Philadelphia Fed manufacturing survey (Thursday)
  • EUR July CPI (Friday)
  • BoC Core CPI data (Friday)

U.S. Economic Data includes:

Export/Import price index (Tuesday), Redbook index, API crude oil stock, July retail sales (Wednesday), July industrial production, nonfarm productivity, capacity utilization, MBA mortgage applications, July building permits (Thursday), July housing starts, weekly jobless claims, Philadelphia Fed manufacturing survey, Michigan consumer sentiment index (Friday), Baker Hughes US oil rig count. 

Overseas Economic Data includes: CNY FDI data (Monday), CNY retail sales (Tuesday), CNY industrial production, German Q2 GDP, German Harmonized Index of Consumer Prices, French CPI, GBP June average earnings, GBP unemployment data, EUR Q2 GDP data, EUR industrial production, German ZEW Survey – economic sentiment, AUD Q2 wage price index (Wednesday), GBP PPI, GBP CPI, GBP Inflation report hearings, JPY trade data, JPY weekly foreign bond/stock investments, AUD July unemployment data (Thursday), GBP July retail sales, CAD manufacturing shipments, NZD PPI, EUR July CPI (Friday), CAD July CPI, BoC Core CPI data.