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Good News on Trade Boosts Markets For the week of October 14, 2019

Key Market Data

10/04/2019 10/11/2019 One Week Change YTD One Year
S&P 500 Index 2,952.01 2,970.27 +0.62% +20.38% +11.12%
MSCI EAFE Index 1,854.43 1,896.65 +2.28% +13.89% +6.22%
Barclays Capital U.S. Aggregate Bond Index 2,238.05 2,215.04 -1.03% +8.23% +10.50%
10-year Treasury Note Rate 1.530% 1.731% +20.1 basis points -95.4 basis points -142.0 basis points

Trade war winds have been buffeting the global economy, and stocks, since the middle of last year. The mere breath of good or bad trade news seems to move markets with ease. And it was more of the same last week, as the U.S. and China reached a limited agreement on Friday. Investors viewed the news as a breakthrough and sent the Dow and S&P 500 up for the first time in four weeks. The yield on the 10-year Treasury advanced late in the week as some investors, cheered by the progress on trade, looked to stocks over bonds.

At midweek, the prospects of a breakthrough on trade were dim. Stocks had been falling because, before the meeting with China, the United States blacklisted 28 Chinese companies for their role in the repression of China’s Uighur population in its Xinjiang region. The U.S. also announced visa restrictions on some Chinese officials involved with the repression.

At the opening bell on Wednesday, the Dow was off 409 points for the week. The rebound began after President Trump said he’d personally meet with China’s leading trade negotiator, Vice Premier Lie He, who was in Washington for the negotiations. The U.S. government also granted some special licenses to American tech companies, allowing them to continue to do business with Huawei, China’s telecom giant.

The rally picked up steam after the “phase one” agreement was reached on Friday, with the Dow gaining 652 points over three days. As part of the agreement, which President Trump described as “very substantial,” the United States won’t raise tariffs on $250 billion in Chinese goods from 25 percent to 30 percent. Those tariffs had been scheduled to begin on Oct. 15. In return, China agreed to buy $40- to $50-billion a year in American agricultural products, up from $21 billion in 2017, before the trade war began.

The Dow rose more than 500 points on Friday but pulled back once investors learned that the deal was less comprehensive then some hoped — there was no agreement on the fate of Huawei, for example, and the round of new tariffs scheduled for mid-December is still looming. In addition, the Chinese did not officially confirm how much they’d spend each year on farm goods. As Treasury Secretary Steven Mnuchin said, “We have a fundamental agreement on the key issues, but there is a significant amount of work to do.” Phase two will begin after the formal signing of the agreement worked out on Friday. That’s expected to happen next month at the Asia-Pacific Economic Cooperation summit in Santiago, Chile, which Trump and China’s President Xi Jinping are both scheduled to attend.

The Fed

The Federal Reserve meets at the end of this month with investors expecting the Fed to cut its rate for the third time this year. Speaking in Denver last week, the Fed’s Chairman Jerome Powell did nothing to dispel that expectation. He said, “Growth around much of the world has weakened over the past year and a half,” but later added, “There’s no reason why the expansion can’t continue.” He also said, “policy is never on a preset course and will change as appropriate in response to incoming information.”

Powell also announced that the Fed would address recent money market volatility by buying short-term Treasuries through the second quarter of 2020. Beginning next month the Fed will spend $60 billion on short-term Treasuries. Mr. Powell insisted, “This is not QE,” referring to the Fed’s quantitative easing program during the Great Recession. The minutes of the Fed’s last meeting, at which it cut its rate, were released last week, and they showed that committee members were concerned that risks associated with trade tensions and adverse developments in the geopolitical and global economic spheres would take a toll on hiring and reduce consumer spending.

New IMF Chief

In her first speech at the helm of the International Monetary Fund, Kristalina Georgieva said that the trade war between the U.S. and China could cost the global economy as much as $700 billion next year. “In this scenario, the whole economy of Switzerland disappears,” she said, adding that the world’s economy “is now in a synchronized slowdown.” Ms. Georgieva succeeded Christine Lagarde as the IMF’s managing director.

Brexit

Investors were also heartened late last week by signs of progress between the European Union and Great Britain regarding a revised Brexit deal. Britain’s Prime Minister Boris Johnson met with his Irish counterpart Leo Varadkar and they issued a joint statement saying they could see a pathway to a possible deal. A key sticking point that remains: how the border between Ireland, still in the EU, and Northern Ireland, part of Britain, will be managed. Still, with the Oct. 31 deadline looming, Johnson only has until Oct. 19 to make a deal. On that date a new law, passed by Parliament against his will, requires him to ask for an extension, which would be the fourth. Johnson will meet with EU officials in Brussels on Thursday

In other news, the producer price index fell 0.3 percent in September from August, its biggest drop in eight months, and was up 1.4 percent for the year, the lowest figure since 2016. Core PPI, less food, energy, and trade, was also down 0.3 percent in September from the month before and up 2 percent for the year. The consumer price index climbed 0.1 percent for the month and 1.7 percent for the year; core CPI rose 0.1 percent for the month and 2.4 percent for the year. Job openings fell to 7.1 million in August from 7.2 million in July, down for the third month straight, the first such streak since 2009. Even so, there were 1.2 openings for every job seeker. The University of Michigan’s preliminary reading of consumer sentiment for October unexpectedly rose to a three-month high of 96 compared to September’s 93.2. The NFIB’s small business optimism Index declined to 101.8 in September compared to 103.1 in August, but September’s reading was still within the top 20 percent of all of the readings in the index’s 46-year history. And first-time jobless claims for the week ending Oct. 5 fell 10,000 to 210,000; the four-week moving average was up 1,000 to 213,750.

A look ahead

This week’s updates will include the latest on retail sales, business inventories, the Fed’s Beige Book report, building permits, housing starts, industrial production, and the Conference Board’s leading index of economic indicators.

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.