Daily Market Color

China Tariff Threat Scares Risk Assets Despite Strong Inflation Data


Consumer Spending Remains Solid, Inflation Hits Target

This morning a report from the Commerce Department presented a strong case for more US economic growth in the second half of the year.  Personal spending amongst American households rose by a seasonally adjusted 0.4% during July, matching expectations and extending the prior month’s robust jump.  The figure was driven largely by consumers increasing purchases at restaurants and hotels and was supported by a 0.3% growth in personal income.  Compared to July 2017, consumer spending climbed 2.8% — the highest YoY jump in more than a year.


Separately, the personal-consumption expenditures price index (the Fed’s preferred measure of inflation) recorded a 2.0% rise in core consumer prices YoY, while overall prices increased 2.3% on an annualized basis.  It was the third time this year that the core index met the Federal Reserve’s target level, providing further support for a quarter-point hike at the September FOMC meeting.  The probability of a hike at that meeting is currently near 95%, as per Fed Funds futures.



Trade Talk

The clock is ticking for Canada as tomorrow’s deadline nears for a deal to be struck with the US and Mexico in rewriting the 24-year old NAFTA agreement.  On the positive side, today Canadian Foreign Minister Chrystia Freeland referred to the negotiations as entering “an intense rhythm” in which there was progress being made and good will built on both sides of the table.  One of the major points of contention continues to be the inclusion of a special courts process to challenge any tariffs imposed by one of the member nations, a right which Mexico had agreed to remove in its pact with the US.



Any progress in trilateral talks between the US, Mexico and Canada was overshadowed this afternoon by a Bloomberg report which stated that President Trump had notified his aides of his willingness to impose tariffs on an additional $200 billion worth of Chinese imports as early as next week.  Within the last month, there have been two separate rounds of offsetting tariffs on $50 billion worth of imports between the US and China, while Trump has been on record threatening duties on a combined $500 billion worth of imports (for which China has promised retaliation).



The report on Chinese tariffs prompted an immediate flight to safety in financial markets.  Major US stock indices snapped a four-day winning streak, as the DJIA declined 0.53%, S&P 500 fell 0.44% and the tech-heavy Nasdaq lost 0.26%.  This overall downward move was happening despite Amazon rising to a record high during the trading session, crossing the psychologically significant $2,000/share level.  In bond markets, US Treasurys benefitted from the flight to safety, with yields/swap rates declining 1-4bps across the curve and the 10-year note yield settling near 2.86%.  Crude oil futures extended yesterday’s rally, gaining 1.1% on the day to settle back above $70/barrel, as supply concerns in Iran and Venezuela added to the EIA report which displayed a continued decline in US stockpiles.   



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