Stocks opened slightly lower this morning (Dow -40 pts; SPX -.34%) on trade tensions (see below). Defensive sectors are catching a bid (utilities +1.4%; consumer staples +.2%), but cyclicals like tech and financials are down. Asian markets were down about .5% overnight after Hong Kong police used tear gas to break up a huge protest against a new legislative bill allowing Hong Kong citizens to be extradited to mainland China. WTI crude oil fell back to $51.90/barrel after a US crude inventory report suggested oversupply. Bonds are in rally mode today as yields drop. The 10-year Treasury yield backed down to 2.12%.

President Trump indicated he is delaying a trade deal with China until that country’s officials reaffirm terms negotiated earlier this year. The president is referring to US Trade Representative Robert Lighthizer’s claim that China reneged on trade commitments right before the deal was supposed to have been completed. “It’s me right now that’s holding up the deal. And we’re going to either do a great deal with China or we’re not going to do a deal at all.” Mr. Trump and Xi Jinping are expected to meet at the upcoming G-20 Summit, but that is by no means assured. A firm deal between the two men is unlikely.

The Consumer Price Index (CPI) slowed to 1.8% in May from 2.0% in the prior month. Retail inflation is clearly slowing. This report corroborates yesterday’s wholesale inflation report. Core goods prices are falling, but services prices continue to rise. Energy-related goods are down, but restaurant inflation is up around 3%. There are some crosscurrents here. We know that an economy at full employment tends to increase inflation, and of course rising trade tariffs are inflationary as well. But slowing global economic growth—the US stepped down to 2.3% this year from 3% last year—is deflationary. The Federal Reserve’s official view is that slowing inflation is a temporary trend, but this report will add pressure to cut interest rates.

Speaking of full employment, real hourly earnings for US workers rose 1.3% from year-ago levels in May. That’s a pick-up from the prior month. That doesn’t sound like much, but remember, “real” means adjusted for inflation. So 1.3% + 1.8% CPI = 3.1%. Other gauges of wage growth are even higher. April’s Personal Income growth report (from the Bureau of Economic Analysis) came in at 3.9%.

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