Stocks gapped down at the open (Dow -216 pts; SPX -.4%) on renewed trade war fears. The hardest-hit sectors are energy (-1.8%), industrials (-.8%,) and materials (-1.1%). The poster children for trade jitters, Boeing and Caterpillar, are down over 2% in early trading. Real estate, consumer staples and utilities are the only sectors in the green. The VIX Index jumped to 12.5. European markets are poised to close down about .5%. WTI crude oil is down 3% to trade around $64.60/barrel. Most other commodities are lower as well (gold -1.7%; copper -2.9%; ag products -1%). Bonds are responding positively. The 5-year and 10-year Treasury yields backed down to 2.79% and 2.92%, respectively.
The Trump Administration issued a statement imposing 25% trade tariffs on up to $50bil in Chinese imports. The Chinese government immediately responded with tit-for-tat tariffs of their own. To start, the US will set tariffs on a list of about 800 imported goods worth about $34bil. An additional list of nearly 300 items worth $16bil could be added later. So with that goes hopes that the stock market will continue marching higher this month. We expect stocks to be range-bound for a while.
Economists currently project second quarter economic growth (GDP) to be nearly 4%. That’s an average of all predictions tracked by CNBC and it is a huge figure. The Atlanta Federal Reserve’s “GDPNow” forecast calls for 4.8% growth! Other firms like Bank of America/Merrill Lynch and Barclays expect about 3.7% growth. Of course, most forecasters believe this high rate of growth is temporary and that long-term, the US economy can sustainably grow at a 2% rate.
China’s economy lost some momentum in May. For some time, economists have been forecasting 6.5% economic growth for China this year, vs. 6.9% last year. But while some deceleration was expected, yesterday’s economic data was a bit surprising. Industrial output fell about 7% from year-ago levels. Retail sales slowed to about 8.5% y/y growth, the slowest pace in several years. Fixed-asset investment fell about 6% in the first five months of 2018 vs. the same period last year. The central bank is trying to control credit growth because explosive growth in lending could be a big problem for China’s economy down the road. Bloomberg put it perfectly: “The central bank is trying to walk a fine line in its efforts to cut debt without tightening too much and strangling lending and growth.”