A mixed week for equities. U.S. stocks were generally higher with the S&P picking up +0.8% and small-caps +0.6%. The NASDAQ managed a +1.0% gain as Apple’s market cap surpassed $1 trillion as you can see below – read more here, the first U.S. company to achieve this feat.
It is hard to believe that Steve Jobs died in 2011 when Apple had a market cap of ‘just’ $300bn.
International equities, on the other hand, were weaker. The developed EAFE index dipped -1.0% and the emerging markets lost -1.1%. Chinese H-Shares lost -3.0% and A-shares were off -5.4%.
Bond yields ticked lower and intermediate-term government bonds gained +0.1% on the week. High-yield was up +0.5% and bank loans added +0.1%.
Decent Job Growth, Modest Wage Pressures
Friday’s job report for July was solid, despite the fact we saw the slowest pace of hiring in four months. Non-farm payrolls increased by 157K, short of the roughly 200K expected. However, the previous two months were revised higher by close to 60K. Average growth over the last three last three months has averaged a decent 224K/month (see chart below).
Wage growth stayed under control despite the unemployment rate falling below 4% once again. Average hourly earnings increased at an annual rate of 2.7% in June, in line with expectations.
For those looking for building signs of inflation this served to assuage the fears, at least for the time being. Bond yields dipped modestly after the report and the dollar sold off.
September’s a Lock, but Maybe December is in Play?
Does Friday’s jobs report mean much for Fed policy? Probably not. The Fed met Tuesday and Wednesday and they surprised nobody by signaling their next hike will come on September 26th.
Goldman summarized the Fed’s statement as follows:
“…The most notable change to the post-meeting statement was the upgrade to economic activity from “solid” to “strong”, echoing the 4.1% Q2 GDP growth reported last Friday… We do not believe today’s statement has major implications for near-term policy, and we continue to expect a hike at the September meeting, with subjective odds of 85%.”
The market largely agrees with this. They place the odds of a September hike at roughly 95%, as you can see below.
A battle is brewing over another hike in December, though. So far, the odds of a December hike stand at 65%. While it is unlikely the Fed will skip this move even if we get another couple soft payroll numbers, could their December statement set a more dovish tone for 2019, especially if the housing market continues to soften? Time will tell.
3D Chess is Hard
More trade news this week. On Wednesday it emerged that President Trump had asked his advisors to look into raising tariffs on $200bn of Chinese goods from a proposed 10% to 25%. Then on Thursday China threatened to retaliate by imposing new tariffs on $60bn worth of imports from the US, including aircraft, liquid natural gas and soybean oil.
While the war of words goes on, China continues to allow its currency to depreciate. As you can see below, the Chinese yuan slipped for the eighth week in a row to its lowest level since May of 2017 (a rising line means a stronger dollar and a weaker yuan).
This is a sign that the trade war between the U.S. and China is being fought on multiple fronts. Tariffs are but one tool. As BCA notes:
“The U.S. exported only $188bn of goods and services to China in 2017, a small fraction of the $4524bn in goods and services that China exported to the United States. China simply cannot win a tit-for-tat trade war with the United States. In contrast, China is better positioned to wage a currency war with the United States. The Chinese simply need to step up their purchases of U.S. Treasurys, which would drive up the value of the dollar.”
A stronger dollar has the perverse impact of increasing the trade deficit by making foreign goods cheaper for U.S. consumers. On Friday we found out that the U.S. trade deficit climbed 7% in June and is on track for a 10-year high. The U.S. trade deficit totaled $291 billion in the first six months of 2018, compared with $272 billion in the first half of 2017.
Part of the increased deficit is certainly due to the tax cuts and increased fiscal spending of the last few months spurring the demand for foreign goods. But part is due to the strength of the dollar, which is up 6% against the major currencies since late January.
When it comes to trade we run the risk of getting trapped in a vicious cycle. More domestic trade protection leads to foreign retaliation in the form of currency depreciation versus the dollar. Dollar strength leads to wider trade deficits, which then leads to more trade protections. Rinse repeat.
Of course, the trade issue won’t go away anytime soon. With the mid-terms coming up we can at least expect the administration to zero in on China’s currency policy. Now what you can do about that isn’t self-defeating it is another question.
Have a good weekend.
Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.