Risk markets fell victim to twitter and the trade war on Friday in what had been a fairly encouraging week of monetary policy narratives and strong earnings.  Given a fairly light economic calendar, the focus last week fell to the annual Jackson Hole gathering of monetary policy wonks and a batch of encouraging retail earnings reports.  Equity markets had posted modest gains for the week until Friday morning when China registered a retaliatory response to the August U.S. tariff announcement. Not to be outdone, the U.S. quickly responded with a retaliatory tariff and an eyebrow raising executive branch order to private sector corporations.  Stocks and commodities moved lower and the 2yr/10yr slope closed in negative territory for the first time in over ten years.

Market Anecdotes

  • A POTUS admission that tariffs put U.S. companies at a competitive disadvantage (Apple v Samsung) and a softening of the language suggested he may be capitulating until Friday…
  • The closely watched annual Jackson Hole central bank symposium served to soothe markets.  Powell’s speech was viewed with an easing bias, but other narratives worked to calibrate the market’s policy rate expectations.
  • The release of July’s FOMC minutes portrayed a divided Fed not quite ready to commit themselves to further rate cuts despite expectations priced into the financial markets. They viewed the July cut as a mid-cycle ‘adjustment’ rather than the beginning of a rate cut cycle.
  • Shares of retailers (both specialty and multiline) soared last week on robust earnings reports which bolsters the thesis for a healthy consumer.  It was the best week for specialty stores since 2011 and for multi-lines since 2008.
  • A 30yr TIPS auction settled at 0.501%, down significantly from the last auction’s 1.091% and the lowest since 2012.  YTD through 8/20, long-term treasuries were up over 20% for the first time since daily data became available in 1987.
  • A $200b downward revision in corporate profits and a -500,000 revision in jobs data (year through March) from the BLS may serve to bolster Fed doves and seems more consistent with trends in household surveys’ showing weaker readings in employment.
  • ECB meeting minutes detailed full blown easing discussions including modifying guidance, lower interest rates, and quantitative easing. A rate setting committee member indicated the ECB is looking to unveil a “significant and impactful policy package” in September.
  • Terry Haines from Pangaea Policy painted a constructive picture in a Bloomberg interview of U.S.-Sino trade negotiations expecting no near-term resolution but fewer hardline narratives from both sides having now been painted into a corner of more tangible recession risks.
  • Italy’s PM Conte signaled his resignation, sparking increased political uncertainty in Italy.

Economic Release Highlights

  • U.S. August flash PMI (50.9, 50.9, 49.9) saw the manufacturing reading fall into contractionary territory which hasn’t happened since the GFC.  However, the report internals and regional Fed surveys both remain stronger than ‘12 and ‘15 mid cycle pullbacks.
  • Global August flash PMIs were largely unchanged with Japan (51.7, 53.4, 49.5) and EZ (51.8, 53.4, 47.0) holding onto expansionary service sector and sub-50 manufacturing readings.
  • July existing home sales of 5.420mm beat consensus and maintained a trend of improving momentum.  Inventories fell to their lowest level since May 2018.
  • July new home sales (635k) missed expectations (a notoriously volatile series).  The three-month average fell slightly (655k).  We also saw a material upward revision to June (728k) which now marks a new monthly expansion record high.
  • The Conference Board’s LEI registered a new expansion high while the LEI/CEI to ratio remained in the same range we’ve seen since the last leg higher ending early 2018.
  • The semi-annual CBO forecast update showed modestly higher GDP growth, and increases in CAPEX, the trade deficit, and federal debt.