INCREASING PRESSURE ON CHINA

The major stock market averages gapped up at the open, but quickly faded. The Dow is currently up 47 pts and the SPX is up .29%. Energy is the best performing sector, up 1.1% on higher oil prices. And unlike yesterday, cyclical sectors are faring well but defensives are in the red. There’s just no discernible trend in the market this week. European stock markets closed roughly flat this morning and most of Asia was lower overnight. Hong Kong protests over a proposed extradition law are gaining momentum and have grown violent. Bloomberg reports hundreds of thousands of people are involved. Hong Kong is officially autonomous but China’s communist party exercises effective control. Commodities are trading sharply higher, led by oil. WTI crude oil climbed back to nearly $53/barrel after terror attacks—likely initiated by Iran—on two oil tankers in the Strait Hormuz. Bonds are again moving higher in price, lower in yield. The 10-year Treasury yield is hovering around 2.10%.

Bond traders are absolutely convinced the Federal Reserve will lower interest rates more than once this year. A big part of the reason is that global economic growth & inflation are slowing, and there is no end to the trade war in sight. But CNBC’s Steve Liesman points out that many Wall Street economists (and the Fed) still expect the US economy to grow at about 2.4% this year. In other words, growth is still running above what the Fed calls its long-run potential of 2%. So how is monetary easing a foregone conclusion? How is it even necessary, he wonders?

This is a rough week for China. On top of escalating trade tensions and the Hong Kong backlash over communist overreach, economic data is softening. China’s gross domestic product (i.e. economic growth) is growing at its slowest pace since 2009. The official manufacturing business activity index (“PMI”) has fallen below 50, indicating mild contraction. Auto sales are down 16% from year-ago levels. The dollar volume of imported goods is down 8.5% from year-ago levels. This is why Chinese monetary and fiscal authorities are in stimulus mode. Tomorrow China will release the latest data on industrial production and retail sales.


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