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Weekly Market Review

27 August 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending August 23, 2019

The U.S.

The 2.5% decline in U.S. large caps Friday sent the representative index down about 1.4% on the week while small caps declined about 2.3%. The scheduled economic and market reports last week were rather light, but other news items released Friday drove markets. China escalated the trade war by announcing retaliatory tariffs against $75 billion in U.S. goods with as much as 10% tariffs on top of the existing rates. The U.S. counterretaliation followed when the Trump administration increased existing tariffs by 5%. As a result, the tariffs on approximately $225 billion of Chinese goods jumped from 25% to 30%. The tariffs on about $300 billion of goods will go up from 10% to 15%, once they are phased in, between September 1 and December 15 of this year.[i] Treasury yields plunged with the 2-year and 10-year Treasuries falling 10-basis points to 1.51% and 1.52%, respectively. The short end of the yield curve was more stable with most maturities out to 1-year down up to 6-basis points.

The economic reports released last week appeared to show an economy that is slowing, with the manufacturing sector taking the brunt of the slowdown. The IHS Markit manufacturing Purchasing Managers Index (PMI) for August was released last week and indicated that the U.S. manufacturing sector has just barely dipped into contraction, coming in at 49.9, a 119-month low. A reading of 50 is the dividing line between expansion and contraction. A slower economy was also indicated by the IHS market services PMI, which declined from 53.0 in July to 50.9. Both sectors of the economy noted a decided slowdown in new business growth thus far in August with new orders the weakest since October 2009, when the IHS Markit PMIs began.[ii]

Conversely, the decline in mortgage rates has brought buyers back into the market as existing home sales increased from 5.29 million in June to 5.42 million in July. The constraint on the housing market now is the lack of inventory, which now sits at 4.2 months, well below the typical supply of 6 months. New home sales declined from 728,000 to 635,000, illustrating that the housing market is still struggling overall.

Other items of note:

Weekly Jobless claims are down from 221,000 the previous week to 209,000, labor markets still appear robust.

The Leading Economic Indicators Index increased 0.5% following two months of decline and indicated the economy may still expand over the next few months as rising stock prices, the Leading Credit Index, and housing permits lead the index higher.[iii]

International

International equities were mostly positive last week with developed markets rising about 0.9% and emerging stocks up about 0.4%. International markets felt the effects of the trade war but also on the economic news front. China’s increase in tariffs came Friday after trading closed around the world except in the U.S. Therefore, International markets were not impacted Friday because of the news. However, the manufacturing sector in the Eurozone continued to contract but did see a slight improvement, in early August as the IHS Markit manufacturing PMI increased from 46.5 in July to 47.0.[iv]

Similarly, the services sector improved slightly, rising from 53.2 the month before to 53.4. The weakness in the Eurozone continues to be Germany, with a manufacturing sector mired in the low 40s while the services sector shows relative strength at 54.4. The German economy has contracted in the second quarter with GDP slipping to -0.1%.[v]

Summary

The trade war continues to be a primary driver of equity and bond markets. The next Twitter comment or news story can drive the market up or down depending on the tone of the release. Last week it was mostly negative news on the trade front as both China and the U.S. increased tariffs on goods. Early Monday, the comments were positive, and the markets stabilized in Europe and increased early in the U.S. The yield curve between 2-years and 10-years inverted several times last week and then quickly returned to a positive spread, though very small. Oil prices showed the volatility as well and ended the week down, but gold rose and briefly exceeded $1,550 for the first time in six years as fears of a global recession increased.


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[i] CNBC (2019), Dollar tumbles as US-China trade tension intensifies. Retrieved from https://www.cnbc.com/2019/08/23/forex-markets-federal-reserve-new-zealand-dollar-in-focus.html
[ii] PMI by IHS Markit (2019), IHS Markit Flash U.S. PMI™. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/8d045df65df54d4694039324224684e0
[iii] The Conference Board (2019), The Conference Board Leading Economic Index® (LEI) for the U.S. Increased in July. Retrieved from https://www.conference-board.org/data/bcicountry.cfm?cid=1
[iv] PMI by IHS Markit (2019), IHS Markit Flash Eurozone PMI®. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/608e6723ccc442bb817d795b47608b18
[v] PMI by IHS Markit (2019), IHS Markit Flash Germany PMI® Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/a38ce17ae00e414cb906d11536c94ca4
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