Stocks sank at the open this morning after the latest round of trade tariffs were imposed on $300bil of goods imported form China. On top of that, President Trump Tweeted that if he is reelected, hammering out a trade deal with China “would get MUCH TOUGHER.” The Dow is currently down 325 pts and the SPX is down .7%. Sectors down more than 1% in early trading include industrials, tech, financials and energy. European stock markets are poised to close down about .4% and Asian markets were mixed overnight. Commodities are mostly lower as well (except for gold +1.2%). WTI crude oil is back down around $53.25/barrel, a three-week low.
Bonds are not surprisingly catching a bid, pushing rates lower. The iShares 20+ Year Treasury Bond ETF (TLT) is up .7%. The yield curve recently inverted, meaning that the 2-year Treasury yield is now slightly higher than the 10-year yield. And as I’ve pointed out previously, this condition is usually associated with an environment of slowing economic growth. Presently, it is also indicative of the strong foreign demand for US Treasury securities because bond rates in key overseas markets are zero or negative.
ISM’s closely watched manufacturing index sank to 49.1 in August, signaling contraction. This is the first sub-50 reading in three years. Key components of the index measuring new orders and backlogs fell below 50.0 as well. Economists at Bloomberg blame “economic uncertainty, fomented by market volatility and ongoing trade war escalation, manifested in increasingly defensive posturing among businesses…” The obvious conclusion, therefore, is that the manufacturing sector will continue to deteriorate if the trade war gets worse. Importantly, however, Bloomberg says the manufacturing sector can fall into its own recession without dragging the entire economy into recession (remember 2015?). They say the ISM Manufacturing Index would have to fall into the 40s in order to “be consistent with a broader downturn.” Manufacturing accounts for only about 10% of the US economy, whereas consumer-oriented service businesses are much more critical to economic growth.