The major stock market averages opened lower as the trade war with China escalated. The Dow is down 290 pts and the SPX is down 1.4%. The pattern over the last few trading sessions has been a sharp decline in the morning following by a recovery in the afternoon. We’ll see if that pattern persists today; my guess is that traders won’t want to be “long” going into the weekend. Tech and healthcare are the worst performing sectors at the moment, down about 1.8%. Utilities is the only sector in the green. The VIX Index continues to hover around 20, which is typically considered the lower threshold of elevated fear among traders. Overseas things are looking better. European markets closed flat. China’s Shanghai Composite Index actually closed up by 3%! Commodities are trading mostly higher. Copper, gold and iron ore are up a bit. WTI crude oil is flat at $61.60/barrel. Bonds are following the same pattern we’ve seen through the week. Treasuries are up in price, down in yield; high yield corporates (junk) are down in price, up in yield. The 10-year Treasury yield is all the way back down to 2.43%. So bonds are painting a risk-off picture, if only temporarily.

As threatened, President Trump raised trade tariffs on $200bil of Chinese imports from 10% to 25%. The new schedule of tariffs will go into effect with goods leaving China on May 10th. That little delay gives negotiators time to grope toward a deal, and investors are clinging to that hope. In a Tweet this morning, the president said, “Talks with China continue in a very congenial manner—there is absolutely no need to rush” toward a deal. Chinese officials, perhaps still stunned that US Trade Representative Robert Lighthizer called them out for negotiating in bad faith, say they will retaliate but haven’t offered specifics.

The Consumer Price Index (CPI) edged slightly higher in April, but inflation remains very tame. CPI accelerated to 2.0% from year-ago levels, whereas economists were expecting 2.1%. Core CPI, which excludes the more volatile food & energy categories, climbed to 2.1% from 2.0%. Sharply falling apparel prices—along with airfare and financial services fees—are holding down inflation. The various measures of inflation in the US economy are averaging 1.5% to 2%, slightly below the Federal Reserve’s long-run target. So this report confirms the Fed need not resume rate hikes…yet.

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