Part of the Fed’s mandate is to target inflation and maximum employment when charting its path of rate hikes. Fiscal stimulus and economic growth are inflationary in nature. A protectionist state will only further the inflationary outlook for the US and is a path to higher interest rates.
I. Trade Tariffs
Tariff tensions continue to roil global markets, as both China and the U.S. announced levies on each other’s goods. China is not alone. India, Turkey, and member nations within the EU and Canada also announced retaliatory tariffs on U.S. imports. Last Friday, Russia also announced potential tariffs on U.S. autos.
Equity markets took the brunt of the hit amidst the rising tensions, with the Dow Jones Industrial Average continuing its streak of consecutive losses in more than a year. The index fell 2% week-over-week, closing at 24,580.89. While the S&P 500 did get hit on the back of escalating trade tensions, the index bounced back on the back of positive economic data showing a pickup in Business activity within the Eurozone. The index closed the week about 0.9% lower at 2,754.88. Both Fed Chairman Powell and ECB President Draghi noted that a trade war would hurt the global economic outlook, at a conference on Wednesday. A risk-off sentiment drove the ten-year treasury yield lower, which ended last week at 2.895% and is opening 1.8bps lower at 2.877.
Some of the tariffs announced aimed at American goods include:
Eurozone: EUR 2.8 billion ($3.2 billion worth of American goods)
Turkey: $267 million
India: $241million
China: $34 billion
Mexico: $3 billion
Canada: $13 billion
II. OPEC
OPEC and non-member countries agreed to collectively strive to increase output by about 1 million barrels a day, although some producers noted this would likely be closer to 600k a day because of production declines in some countries. Nevertheless, the amounts announced were smaller-than-expected by the market. Oil rallied on the back of the decision. August West Texas Intermediate crude oil contracts, for example, increased by nearly 4.5% to $68.48 a barrel.
III. Bank Of England
The BoE, as expected, kept its key rate at 0.5% citing a lukewarm economy and inflation data reflecting 14-month lows. The increasingly hawkish vote of confidence was 6-3 (from 7-2 during the previous meeting) with Haldane joining Saunders and McCafferty in the dissenting camp and voted to increase the Bank Rate by 25 bps. Equally important to note is that the Committee suggested it would reduce its stock of assets once the Bank Rate hits 1.50% (previously was 2.00%). August futures jumped to a 66% probability of a rate hike on the back of the BoE vote.
IV. Other
Stress Tests: About 35 U.S. banks pass stress tests imposed by the Fed to ensure balance sheets were strong enough to endure a financial meltdown. Morgan Stanley and Goldman Sachs came close to breaching minimum capital levels in a worst-case scenario.
Greece Debt Relief: Eurozone countries came to an agreement regarding a long-awaited debt relief deal for Greece. The deal calls for an addition EUR 15 billion cash loan so that Greece can pay off its debts and pushes off payments the country owes on about EUR 100 billion of existing loans. The agreement exceeded market expectations driving a rally in Greek bonds as 10-year yields fell about 16 bps.
Italian coalition appointed two eurosceptics, Alberto Bagnai as the head of the Finance Committee in the upper house of the Senate and Claudio Borghi as the head of the budget committee in the lower house of parliament. Italian debt and the Euro sold off on the bank of the appointments on Thursday but have since bounced back.
Looking ahead to the week, while tariff tensions will continue to take center stage, other key data/events include:
EU Summit (June 28-29) which will focus on an overhaul of the European Stability Mechanism, the Eurozone’s bailout fund, a new Eurozone budget that will be overseen by the European Commission and Brexit.
The release of European inflation data. Given the ECB’s last move to keep rates on hold until next summer, weaker-than-expected data could place further downward pressure on the Euro.
Russia’s top energy officials are scheduled to meet with U.S. Energy Secretary Rick Perry this week
Almost a dozen IPOs are expected to come to market in the U.S. this week.
Key U.S. Data includes:
Chicago Fed National Activity Index (Monday), new home sales, Dallas Fed manufacturing business index, S&P/Case-Shiller home price indices (Tuesday), Redbook index, MBA mortgage applications (Wednesday), durable good orders, pending home sales, EIA crude oil stocks change, weekly jobless claims (Thursday), GDP, personal/core consumption expenditures (QoQ), personal spending (Friday), personal/core consumption expenditures (MoM), Michigan consumer sentiment index, Chicago PMI.
Fed official scheduled to speak: Bostic (Tuesday), Kaplan, Quarles (Wednesday), Rosengren, Bullard (Thursday).
Overseas Economic Data includes: German IFO business climate/expectations (Monday), JPY leading economic index (Tuesday), CHF ZEW survey (Wednesday), French consumer confidence, Italian trade balance, Italian PPI, SNB quarterly bulletin, NZD central bank rate decision, JPY large retailers’ sales, JPY retail trade, EUR council meeting (Thursday), German import index, German GFK consumer confidence survey, EUR economic bulletin, Italian CPI, EUR economic sentiment/business climate, German harmonized index of consumer prices, GBP GFK confidence, JPY Tokyo CPI, JPY industrial production, JPY unemployment rate, AUD new home sales (Friday), German retail sales, French CPI, German unemployment, GBP GDP, EUR CPI, Bank of Canada outlook survey.
