July 5, 2018

Stocks opened higher this morning but are now fading. The Dow and SPX are currently up 73 pts and .3%, respectively. Consumer staples, healthcare and tech sectors are leading the way (+.5%). Industrials and telecoms are lagging. The VIX Index is back down around 15.6 as some trade war fears fade. WTI crude oil is down slightly around $73.96/barrel. Bonds are trading roughly unchanged. The 5-year Treasury yield is hovering around 2.72% and the 10-year is currently at 2.83%. 

ISM’s Manufacturing Index unexpectedly strengthened in June, rising to 60.2. The index has only hit 60 three times in the last decade. This is probably the most popular gauge of business activity in the factory sector, and it suggests very little impact from international trade tensions. Digging into the details, hiring activity and new orders held steady at very high levels. New export orders actually improving during the month. The report’s inflation gauge slowed a bit but still indicates significantly higher raw material costs for manufacturers.  

The ISM Non-Manufacturing Index rose to 59.1 in June from 58.6 in the prior month. The forward-looking new orders component of the index was especially  strong at 63.2 and surprisingly, export orders improved to 60.5. Any reading above 50 indicates expanding business activity. So again, business activity is rather strong and there is no evidence of trade tariff impact. 

China’s stock market is now in a bear market. The Shanghai Composite is down 23% from its January high. The Shenzhen Index is also down 23%. The biggest reason for that is fear of an emerging trade war. The Yuan, as a result, is weakening. It is true that the Chinese economy is slowing a bit. June’s reading for the Caixin Manufacturing Index fell slightly to 51.0. This is a traditional PMI index so 50.0 is the dividing line between expansion and contraction in national business activity. The index has been hovering around that level for almost a year now. The June report’s new orders component dropped a bit, and export orders are falling. 

The US government is scheduled to begin imposing import tariffs today on $34bil of Chinese imports. The Chinese government has of course pledged retaliatory tariffs. Tomorrow, China is scheduled to raise its import tariff on US pork products to more than 70% and US soybeans to 25%. 

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