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New Trade War Threats Drive Markets Down For the week of August 26, 2019

Key Market Data

08/16/2019 08/23/2019 One Week Change YTD One Year
S&P 500 Index 2,888.68 2,847.11 -1.44% +15.08% +1.69%
MSCI EAFE Index 1,811.86 1,826.73 +0.82% +9.21% -2.77%
Barclays Capital U.S. Aggregate Bond Index 2,226.25 2,228.11 +0.08% +8.87% +9.78%
10-year Treasury Note Rate 1.555% 1.536% -1.9 basis points -114.9 basis points -129.1 basis points

What was already a volatile week for stocks turned almost surreal on Friday when a series of words and actions from China, Federal Reserve Chairman Jerome Powell, and President Donald Trump sent stocks reeling. By the time the market closed (and there was more to come after the final bell), the Dow had shed 623 points and the yield on the 10-year Treasury had fallen to its lowest level since August of 2016 as some investors sought safe havens.

Many investors spent last week waiting to see what Powell would say on Friday about the Fed’s plans. Powell’s planned remarks came at the end of the Fed’s annual conference in Jackson Hole, Wyo. But on Friday morning, before Powell delivered his speech, China announced that it was going to take retaliatory steps against the latest round of tariffs proposed by President Trump. The U.S. tariffs on $300 billion in Chinese goods are scheduled to be imposed in two phases, first on Sept. 1 and then on Dec. 15. China said that on the same two dates it would raise tariffs on $75 billion of American products, including oil, farm produce, and automobiles. The news caused market volatility.

Stocks stabilized after Powell’s comments, in which he reiterated his confidence in the state of the American economy but added, “We will act as appropriate to sustain the expansion.” Wall Street now thinks it’s all but certain that the Fed will again cut its rate when it next meets in September. Powell also weighed in on the trade war, saying, there are “no recent precedents to guide any policy response to the current situation,” adding, “fitting trade policy uncertainty into this framework is a new challenge.” Mark Carney, Governor of the Bank of England — and in Jackson Hole — said the trade war could be “more pervasive, persistent and damaging than previously expected.”

Stocks turned sharply lower, however, after Trump began a barrage of tweets assailing the Fed, Powell, and China. The President tweeted, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” He followed up with, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME.” Then, after the market had closed, Trump again took to Twitter, this time saying that he was going to increase the tariffs already in place on China to 30 percent from 25 percent on Oct. 1, the 40th anniversary of the founding of the People’s Republic of China. He also said he would raise the rate of the next round of tariffs to 15 percent from 10 percent.

On Saturday, as he arrived at the Group of Seven meeting in Biarritz, France, Trump asserted that he had the authority to force American companies to leave China, but on Sunday he seemed to retreat somewhat, saying he was having “second thoughts” about his threats: “Might as well,” he said, “I have second thoughts about everything.” The White House promptly issued a statement saying that his remarks had been “greatly misinterpreted” and he “regrets not raising the tariffs higher.” He was also reportedly trying to sign off on a trade deal with Japan and negotiating one with Great Britain that he described as “bigger than we’ve ever had.” However, early this morning, after a phone call from a Chinese official, Trump called Chinese President Xi Jinping a “great leader,” adding that trade talks were going to restart “very shortly.” He was also reportedly close to signing off on a trade deal with Japan and negotiating one with Great Britain that he described on Sunday as “bigger than we’ve ever had.”

The Fed’s meeting minutes

We got our first look at the Fed’s minutes from its July meeting, at which it cut its benchmark rate for the first time since 2008. Some members at the meeting, not all of whom voted, were for a half-point cut, and others for no cut at all (two of the ten committee members voted against lowering the rate). Given the variable of the trade war, the committee wanted to “avoid any appearance of following a preset course,” noting that it was “important to maintain optionality.”

Tax cuts?

Earlier last week, while saying that we were “very far from a recession,” President Trump said he was thinking about “various tax deductions,” including cutting payroll taxes and capital gains taxes. The next day he retreated from that stance, saying, “I just don’t see any reason to” given the strength of the economy. He also gave what could in retrospect be a preview of his steps on Friday, saying of the trade war, “Whether it’s good or bad, the short term is irrelevant. We have to solve the problem with China.”

Job creation revised

The Labor Department revised its estimate for the number of new jobs for the year through March, saying that 501,000 fewer jobs had been created than originally estimated. That lowered the monthly average for that twelve-month period to 168,000 from 210,000.

Italy’s government dissolves

Italian Prime Minister Giuseppe Conte dissolved the government’s ruling coalition. The move is seen to outflank Interior Minister Matteo Salvini, the leader of Italy’s hard right League party. Salvini was pushing for snap elections that he hoped would give his party more seats and perhaps elevate him to prime minister. If no new coalition is formed, it’s likely that there will be elections in October. All the parties involved have clashed with the European Union over its policies and Italy’s budget.

In other news, the IHS Markit purchasing managers’ index for manufacturing dipped from 50.4 in July to 49.9 in August, its lowest level since 2009. Existing home sales rose 2.5 percent in July from June to 5.42 million according to the National Association of Realtors and were up 0.8 percent from a year earlier, the first year-over-year gain since February of 2018. New home sales fell 12.8 percent in July from June to an annualized rate of 635,000 after an upwardly revised figure of 728,000 for June that was the highest reading since 2007. And first-time jobless claims for the week ending Aug. 17 fell 12,000 to 209,000; the four-week moving average rose 500 to 214,500.

A look ahead

This week’s updates will include updates on the S&P CoreLogic Case-Shiller home price index, consumer sentiment, retail inventories, pending home sales, personal income and spending, and the government’s latest revision on second-quarter GDP, forecast to come in at 2 percent after the initial reading of 2.1 percent.

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