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China’s Currency Manipulation Adds to Wall Street’s Worries For the week of August 12, 2019

Key Market Data

08/02/2019 08/09/2019 One Week Change YTD One Year
S&P 500 Index 2,932.05 2,918.65 -0.46% +17.84% +4.37%
MSCI EAFE Index 1,863.85 1,840.48 -1.25% +9.86% -4.02%
Barclays Capital U.S. Aggregate Bond Index 2,192.69 2,205.23 +0.57% +7.75% +9.32%
10-year Treasury Note Rate 1.847% 1.746% -10.1 basis points -93.9 basis points -118.1 basis points

A new front opened in the trade war Monday: currency manipulation. Fears of a U.S.-China currency battle sent the stock market to its worst day of the year, with the Dow losing 767 points. By Friday, following a volatile week, major indexes regained ground and finished down less than 1 percent for the week. In the meantime, some investors shifted into bonds and gold, driving yields on the 10-year Treasury below 1.6 percent before yields moved higher by week’s end. The price of gold climbed to a six-year high. Trade concerns also pushed Brent crude into a bear market, now off 20 percent from an April high. Importantly, there was no progress on trade over the weekend following a week of escalating tensions.

On Monday, China allowed its currency to slip to its lowest level against the dollar in a decade after President Donald Trump pledged to impose a 10 percent tariff on $300 billion of Chinese goods by Sept. 1. The currency move set off alarm bells because Chinese goods become less expensive on the global market as its currency declines, which in turn makes American goods less price competitive. China’s central bank also accused the U.S. of “unilateralism and trade protectionism.” Finally, the Chinese government said it would stop buying American agricultural goods, sending another blow to U.S. farmers already battered by the trade war. In response, the Treasury Department officially labeled China a “currency manipulator,” a largely symbolic step, but nonetheless one that the U.S. has not taken since 1994.

A day later, the Chinese government walked back its threat and the market began a slow, sporadic recovery. However, that stalled by week’s end after Trump hinted he’d consider postponing a September trade meeting with the Chinese. Trump also announced the government would no longer do business with Huawei, China’s telecommunications giant that’s caught in the trade war’s crosshairs. White House trade advisor Peter Navarro, widely perceived as a hardliner against China, went on CNBC Friday and said China was manipulating its currency to “neutralize” the impact of tariffs, adding that the White House was “going to take strong action against them.” Navarro asserted, “China is the one that suffers far more harm than what might be inflicted on us.” This, after Larry Kudlow, director of the National Economic Council, said China’s economy was “crumbling.” Their comments all come under a cloud of speculation that the Chinese may stall any trade agreement until after the 2020 elections in hopes that Trump won’t be re-elected.

The Trade War’s Toll on China

Meanwhile, new data showed the trade war continues to impact China’s economy. Imports of American goods to China fell 19 percent in July from a year earlier, compared to a decline of 31 percent in June. Exports to the U.S. dropped 6.5 percent; however, China’s global exports were still up 3.3 percent.

The IMF Weighs In

On Friday, the International Monetary Fund (IMF) released a report pushing for a comprehensive agreement to end the trade war, noting that it was “undermining the international system.” The IMF also refuted the U.S. assertion that China was a currency manipulator because there had been “little intervention by the PBC [People’s Bank of China].”

A Fed Cut?

In late July the Federal Reserve cut its rate by 0.25 percent for the first time since 2008, but stocks fell after the Fed indicated it could be a one-time adjustment rather than the first in a series of cuts. But recent trade war escalations may change the Fed’s calculus. A Wall Street Journal poll showed that economists now think there’s a better than 50 percent chance that the Fed will cut its rate when it meets in September. Charles Evans, president of the Federal Reserve Bank of Chicago, on Wednesday said trade war fallout combined with low inflation could justify at least one more rate cut. “You could take the view that the risks now have gone up...that would also call for more accommodation,” Evans said. Trump, meanwhile, continued to assail the Fed, saying, “Our problem is not China. Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast.”

Brexit Takes Its Toll on the United Kingdom’s GDP

In the United Kingdom, concerns about a no-deal Brexit increased as the pound continued to tumble against the euro and the dollar. In addition, GDP growth for the second quarter contracted 0.2 percent from the first quarter, the first such decline since 2012.

In other news, the producer price index rose 0.2 percent in July after a 0.1 percent gain in June, up 1.7 percent over the past twelve months. Core PPI, less food and energy, was off 0.1 percent from the month prior, the first decline since February 2017. The Institute for Supply Management’s nonmanufacturing index fell to 53.7 in July from 55.1 in June, the lowest reading since August 2016 (any reading above 50 indicates expansion). The government said that the number of job openings fell to 7.35 million in June from 7.38 million in May, but there were 1.37 million more job seekers than openings. In yet another read on the trade war’s impact, the Bloomberg Consumer Comfort Index fell from 64.7 to 62.9 for the week ending Aug. 4, its lowest reading in 10 months. And first time-time jobless claims for the week ending Aug. 3 declined 8,000 to 209,000; the four-week moving average rose 250 to 212,250.

A Look Ahead

This week’s key data releases include the latest on small business optimism, the Consumer Price Index (CPI), import and export prices, nonfarm productivity, industrial production and capacity utilization, business inventories, housing starts and building permits, and consumer sentiment.

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