TRADE WAR ESCALATES

Stocks opened lower this morning (Dow -225 pts; SPX -1%) after President Trump threatened another round of 10% trade tariffs on Chinese imports. The market began today’s session as if the next economic recession is right around the corner. Energy, materials and tech are down well over 1%. Only utilities and real estate are catching a bid. The dollar is weaker against a basket of foreign currencies. Perhaps the only real surprise is that oil prices spiked and gold is flat. Safe-haven Treasury bonds are up on the day, whereas junk bonds are falling in value. The 10-year Treasury Note yield tumbled quickly to 1.87%, the lowest since 2016’s presidential election.

Today we found out that the job market is still very strong. The US economy generated 164,000 net new jobs in July, in line with economists’ expectation. The unemployment rate held steady at 3.7%, and the growth rate of average hourly earnings accelerated to 3.2%. More people joined the labor force during the month, and the labor force participation rate climbed to 63.0%. The “under-employment” rate—including discouraged job-seekers and those working part-time because they can’t find full-time position—fell to 7%, the lowest level since 2000. There was one troubling detail in the report: the average workweek dipped to 34.3 hours from 34.4 hours. The trade war is presumably negatively impacting the manufacturing sector. But even there, we saw 16,000 new jobs during the month. So the impact is not clear.

President Trump surprised the world with a Tweet yesterday afternoon threatening more trade tariffs in the wake of another round of failed trade talks. Noting that the Chinese recently promised to buy more US agricultural goods but then failed to do so, he promised “…a small additional tariff of 10% on the remaining $300 billion dollars of goods and products coming from China into our country.” This new round of tariffs will go into effect on September 1st. This announcement caused the Dow to swing from +300 points to -300 points yesterday afternoon.

Famed investor Byron Wein says he believes the Federal Reserve shouldn’t have reduced interest rates because the economy is doing well. He believes the Fed is moving away from its official mandates of full employment and price stability and instead is focused on more peripheral factors such as slowing growth overseas, Brexit, and the trade war. He says the ultra-low rates on US Treasuries aren’t a harbinger of recession, but instead are reflecting the fact that rates all around the world are very low. “A lot of that liquidity is looking for a place to hide, and what better place to hide than US Treasuries.” In other words, bond investors in Europe and Japan world far rather buy the 10-year Treasury Note at 1.87% than their own sovereign bonds carrying zero or negative rates.


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