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Financial Markets Commentary For the week of September 9, 2019

Key Market Data

08/30/2019 09/06/2019 One Week Change YTD One Year
S&P 500 Index 2,926.46 2,978.71 +1.79% +20.50% +5.61%
MSCI EAFE Index 1,842.58 1,882.43 +2.16% +12.68% +1.96%
Barclays Capital U.S. Aggregate Bond Index 2,232.89 2,229.46 -0.15% +8.93% +10.12%
10-year Treasury Note Rate 1.498% 1.561% +6.3 basis points -112.4 basis points -131.3 basis points

The major stock indexes finished up for the second week in a row as, once again, good news about the trade war and the probability of a rate cut by the Federal Reserve outweighed some weak economic data, notably the first contraction in U.S. manufacturing since 2016.

When the stock market reopened after the holiday, investors were greeted by a report from the Institute for Supply Management showing that its manufacturing index had dipped from 51.2 in July to 49.1 in August, the first time it had fallen below 50 since August of 2016 (any reading below 50 indicates contraction but not recession). Separate readings for new orders, employment, and production also fell below 50, with many of the managers surveyed citing the trade war as the driving factor behind the declines. The Dow was down as far as 425 points during the day and ended up shedding 285.26 points.

However, for the rest of the week stocks rose steadily (the Dow added 679 points) thanks to the news of upcoming trade talks and the words of the Fed’s Chairman Jerome Powell. In addition, the ISM’s nonmanufacturing index advanced to 56.4 in August from July’s 53.7 and was up for the 115th week in a row — the nonmanufacturing sector comprises the lion’s share of GDP growth. And the yield on the 10-year Treasury rebounded and was up for the first time in six weeks.

The trade war

At midweek, President Trump gave stocks a major push when he announced that negotiators from the United States would reconvene in October in another attempt to hammer out a deal. The market’s gains came even though both countries had imposed new tariffs on Sept. 1 with another round set to start on Dec.15. In addition, there’s been little evidence that either side is ready to make any major concessions, especially with the People’s Republic of China set to celebrate its 60th anniversary next month.

Still, stocks rebounded, and Larry Kudlow, the head of the National Economic Council, said that a recent phone call between lead negotiators had gone “very well,” while the Chinese said they were hoping for “substantive progress.” This came not long after President Trump said that China’s economy “will crumble” if China tried to wait until after the 2020 election in the hopes that he would lose. The President tweeted, “And then, think what happens to China when I win. Deal would get MUCH TOUGHER!”

Further data showed the impact of the trade war last week. In the United States, the government said that the trade deficit had narrowed 2.7 percent in July from June to $54 billion. It still increased 8.2 percent for the first seven months of the year compared to 2018. China reported that imports declined for the fourth month in a row in August, off 5.6 percent from a year earlier, while exports fell 1 percent, mainly driven by a 16 percent drop in shipments to the United States. And China’s central bank moved to counter the impact of the trade war by saying it would reduce its reserve requirement ratio, the amount of money that banks must set aside to offset risk, by 0.5 percent or more in Sept. 16. That move effectively frees up $126 billion to be lent or spent in the Chinese economy.

Meanwhile, Fitch downgraded Hong Kong’s credit rating for the first time since 2015 because of protests over the city’s relationship with mainland China. On Sunday, protestors in Hong Kong called upon the United States to protect their human rights — President Trump has at some points tied the events in Hong Kong to the trade talks.

There were also other complications. On Monday, China filed a complaint with the World Trade Organization about the latest round of tariffs. China’s telecommunication giant Huawei, which has been front and center in the trade war, accused the U.S. government of harassing its employees and launching cyberattacks.

The Fed’s next step

Wall Street seems all but certain that the Fed will lower its benchmark rate once again when it meets next week, though it’s equally certain that it will be another quarter-point cut rather than the half-point (or more) cut that President Trump has been pushing for. In a speech in Zurich, Powell didn’t say there would be a cut, but he also did nothing to dispel such expectations. He said the Fed was “not forecasting or expecting a recession” but had, “through the course of the year, seen fit to lower the expected path of interest rates.”

Johnson outflanked by Parliament

Boris Johnson’s plan to shutter Parliament so that it couldn’t stop him from leaving the European Union without a deal came apart last week. First, Parliament advanced a bill to prevent a no-deal Brexit on Oct. 31, when Great Britain is scheduled to leave the EU. Then, it foiled Mr. Johnson’s plan to call for a new round of elections to, he hoped, consolidate his power.

While Parliament is pushing for another extension if there’s no agreement with the EU, Johnson said an extension would deprive him of any leverage to negotiate a better deal than the one that Parliament has already rejected more than once, leading to what he described as further “dither and delay.” Once the bill for a no-deal Brexit is passed, Parliament is expected to allow new elections, but the timing and the outcome remain in doubt. Meanwhile, amidst the tumult, the pound dropped to its lowest level against the dollar in 34 years.

The jobs report

Stocks continued their advance on Friday despite what was seen as a so-so jobs report, perhaps because investors believed it would firm up the Fed’s case for a rate cut. Only 130,000 jobs were added last month, below the estimate of 150,000, and the monthly average for 2019 fell to 145,000, the slowest pace since 2010. However, the jobless rate remained at 3.7 percent, wages were up 0.4 percent from July and a solid 3.2 percent for the year, and the labor force participation rate improved to 63.2 percent from the 63 in July.

In other news, construction spending was up 0.1 percent in July from June (revised from a decline of 1.3 percent to a fall of 0.7 percent) but off 2.7 percent from a year earlier. Second quarter worker productivity 2.3 percent after 3.5 percent in the first quarter. And first-time jobless claims for the week ending Aug. 31 were up 1,000 to 217,000; the four-week moving average rose 1,500 to 216,250.

A look ahead

This week’s updates will include the latest on consumer credit, small business optimism, job openings, the producer and consumer price indexes, wholesale and business inventories, retail sales, the import and export price indexes, and consumer sentiment.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.