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Market Commentary, July 23, 2018 For the week of July 23, 2018

Key Market Data

07/13/2018 07/20/2018 One Week Change YTD One Year
S&P 500 Index 2,801.31 2,801.83 +0.02% +6.00% +15.58%
MSCI EAFE Index 1,972.68 1,985.19 +0.63% -1.77% +5.66%
Barclays Capital U.S. Aggregate Bond Index 2,021.77 2,021.15 -0.03% -1.23% -0.43%
10-year Treasury Note Rate 2.828% 2.894% +6.6 basis points +48.8 basis points +63.4 basis points

There was a lot for investors to ponder this week – the simmering trade war, second quarter earnings, the autonomy of the Federal Reserve – and without any clear resolution on any of these issues, the major stock indexes ended the week just a few points away from where they began.

President Donald Trump generated most of the week’s headlines, beginning with what he did or didn’t say after his meeting with Russia’s President Vladimir Putin, and ending with comments about the Fed’s rate-raising that some saw as a breach of presidential protocol. In interviews and his trademark tweets, Trump also weighed in on currency manipulation and rate-fixing by the Chinese and the European Union (EU), and he again raised the possibility of putting tariffs on $500 billion in Chinese exports to the United States. Trump’s comments on the Fed generated the most news after he said on CNBC on Thursday he was “not thrilled” with the Fed raising rates because it put the United States (and the dollar) at a competitive disadvantage against China, which manipulated its currency, and Japan and the EU, which were holding interest rates at or near record lows. “I don’t like all this work that we’re putting into the economy and then I see rates going up,” he said, adding that Europe “is making money easy, and their currency is falling. China, their currency is dropping like a rock. Our currency is going up.” After the interview, Larry Kudlow, director of the National Economic Council, said Trump was not “in any way, shape or form trying to influence the Fed or undermine its independence.” On Friday the president took up the topic again, tweeting, “The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”

Car tariffs and a warning

Trump also continued to threaten to put a 25 percent tariff on European cars and car parts, despite pushback from the auto industry and a bipartisan request from 149 members of the House (99 of them Republicans) not to do so. About 44 percent of all cars sold last year were imports, and the U.S. imported $335 billion in car parts. According to the Alliance of Automobile Manufacturers, the proposed tariff would add about $5,800 on average to the price of an imported car. Reflecting rising concern in Congress, Senator Orrin Hatch (R-UT), the Chairman of the Senate Finance Committee and a staunch supporter of Trump, sent a letter to the White House in which he warned, “If the administration continues forward with its overreliance on tariffs, I will work to advance legislation to curtail Presidential trade authority.”

The G-20 in Buenos Aires

Secretary of the Treasury Steven Mnuchin and the Fed’s Chairman Jerome Powell were in Buenos Aires for the G-20 meeting of central bankers and finance ministers. Prior to the meeting, Mnuchin said he “wouldn’t minimize” Trump’s threat to put tariffs on $500 billion in Chinese goods. He also said that the White House was open to what he described as “real” free trade deals with Japan and the EU, but that any such deal would have to eliminate all tariffs, barriers and subsidies. Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), also opined in on the trade war from Buenos Aires: the IMF’s forecast for global growth in 2018 is 3.9 percent, but she warned that protectionism could shave as much as 0.5 percent off that expansion.

Powell on Capitol Hill

Earlier last week, Powell appeared before the Senate and House where he reiterated his confidence in the state of the economy, said that the Fed would continue raising rates “for now,” and spent a lot of time fielding questions about the potential impact of the administration’s trade policies. Powell insisted that it was too early to tell, but did say that, historically, “counties that have gone in a protectionist direction have done worse” than those that favored free trade.

More on China

China was also in the news because Congress, over objections from members on both sides of the aisle, decided to drop its plans to punish the ZTE Corporation which can now once again buy American parts and software. In addition, China’s second quarter Gross Domestic Product (GDP) came in at 6.7 percent (slightly down from 6.8 percent for the first three months of 2018) due to lower factory output, reduced business investment and the government’s efforts to slow borrowing and lending.

Google fined; Comcast shifts gears

The EU hit Google with a $5.1 billion fine, claiming that the company’s promotion of its Android software, pre-installed on many cell phones, limits competition. Comcast announced that it will no longer bid against Disney for 21st Century Fox but will continue to battle Fox for control of Sky, the British satellite TV provider that is part of that deal.

The Q2 earnings scorecard

Though the stock indexes were little changed for the week, there was daily movement based on positive or negative earnings news. With 17 percent of S&P 500 companies having now reported, the growth rate is 20.8 percent according to FactSet. If that number holds up, the second quarter will post the second highest earnings growth rate since 2010. In other news, retail sales rose 0.5 percent in June from May (which had been revised from 0.8 percent to 1.3 percent). Industrial production increased 0.6 percent in June from the month before and was up 3.8 percent over the past twelve months. Capacity utilization climbed from 77.7 percent to 78 percent, a multi-year high. Housing starts fell 12.3 percent in June from May to 1.17 million, down 4.2 percent from a year earlier. Building permits declined 2.2 percent to 1.27 million, off 3 percent from June of 2017. Business inventories increased 0.4 percent in May from the month before. The National Association of Home Builders (NAHB) index of builders’ confidence for July was unchanged from June’s 68. First-time jobless claims for the week ending July 14 fell 8,000 to 207,000, the lowest total since 1969; the four-week moving average was down 1,000 to 215,000.

A look ahead

This week’s updates will include the latest on existing and new home sales, wholesale and retail inventories, orders for durable and capital goods, consumer sentiment and second quarter GDP, estimated to come in at 4 percent (after 2 percent in the first quarter).