Trade/Currency News Will Drive Market Direction This Week

Aug 12, 2019
Multiple Currencies and Exchange Rates

CPI and Retail Sales Will Try to Bump Trade War From Spotlight

While the economic calendar picks up this week the ongoing fallout from the trade/currency wars will continue to dominate market direction. China’s modest devaluation of its currency last week to seven yuan to the dollar was a shot across the bow. By keeping the value close to seven, and not allowing further devaluation, it also signals China is not,  as of yet, moving to an all-out currency and trade war. Away from the geo-political intrigue the July CPI report tomorrow and retail sales on Thursday will provide some economic fodder for investors, though it may not be as consequential as the aforementioned trade/currency  impact. CPI is expected to be another docile read on inflation and retail sales are expected to be solid but off from the strength in June. With GDP so reliant  on the consumer any pullback on spending beyond the expectation will be another bond-positive development.


Treasuries
Treasury Curve Today Week Change
3 Month 1.98% -0.04%
6 Month 1.94%  UNCH
1 Year 1.76% -0.01%
2 Year 1.60% -0.02%
3 Year 1.54% -0.04%
5 Year 1.53% -0.05%
10 Year 1.69% -0.08%
30 Year 2.20% -0.12%
Short-Term Rates
Fed Funds 2.25%
Prime Rate 5.25%
3 Mo LIBOR 2.18%
6 Mo LIBOR 2.05%
12 Mo LIBOR 1.99%
Swap Rates
3 Year 1.497%
5 Year 1.454%
10 Year 1.573%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Aug 13 NFIB Small Business Optimism July 104.8 103.8 103.3
Aug 13 CPI (MoM) July 0.3% 0.3% 0.1%
Aug 13 CPI Ex-Food & Energy (MoM) July 0.2% 02.% 0.3%
Aug 13 CPI (YoY) July 1.7% 1.7% 1.6%
Aug 13 CPI Ex-Food & Energy (YoY) Jun F 2.1% 2.1% 2.1%
Aug 14 Import Price Index (YoY) July -2.0% -2.0% -2.0%
Aug 15 Nonfarm Productivity 2Q P 1.4% 1.4% 3.4%
Aug 15 Advance Retail Sales (MoM) July 0.3% 0.3% 0.4%
Aug 16 U. of Michigan Consumer Sentiment Aug P 97.2 97.0 98.4

calendar icon Top 5 Events for the Week

Aug. 12 - 16, 2019

1. Trade-Related Fallout – All Week
2. July CPI Report – Tuesday
3. July Advance Retail Sales – Thursday
4. August U. of Mich. Sentiment – Friday
5. Second Quarter Productivity – Thursday

 

1.  Trade-Related Fallout – All Week

The ongoing fallout from the trade/currency wars will continue to dominate market direction this week. China’s modest devaluation of its currency last week to seven yuan to the dollar was a warning shot across the bow. By keeping the value close to seven, and not allowing further devaluation, it also signals China is trying not to move to an all-out currency and trade war, but we await the U.S. response. If the U.S. tries to raise the stakes you can expect a further yuan devaluation. With 20% of China’s exports U.S. bound they do have reasons to believe a weakening of the currency will help offset tariff costs and also cheapen goods to the other 80% of exports that go to non-U.S. destinations. The challenge for China in a devaluation scenario is the capital outflows it might trigger like what happened in 2015. The  Chinese, however, learned from that experience and put more capital controls in place and that may embolden them in a 2019 devaluation scenario. The risk in a devaluation scenario is that emerging markets will be forced to do the same and that will trigger increasing deflationary forces, further central bank rate cuts with the Fed forced to follow and a race to the bottom in rates and yields will continue.

 

Chinese Currency Per Dollar

 

2.  July CPI Report – Tuesday

While the trade and currency war developments will drive the week’s trading direction, the CPI report is probably the leading economic release, but as long as it comes close to forecasts it’s not likely to impact the Fed’s rate-cutting ambitions for September. Expectations are for overall CPI to be up 0.3% versus a 0.1% increase in June. The core rate (ex-food and energy) is expected to increase 0.2% after June’s 0.3% increase which broke a string of four straight months of 0.1% gains. On a year-over-year basis, CPI is expected to increase 1/10th to 1.7% versus 1.6% while core CPI YoY is expected to remain unchanged at 2.1%.  As for the Fed’s reaction function we think a stronger than expected inflation read doesn’t stymie a rate cut in September but a weaker report does up the odds of a 50bps cut in September.

 

3.  July Advance Retail Sales – Thursday

Retail sales finished the second quarter strong with June posting outsized strength that helped push consumer consumption over 4% for the quarter and that helped carry second quarter GDP to a better-than-expected 2.1% annualized print. With business uncertainty continuing to abound, the consumer will need to carry the day again if third quarter GDP is to meet its 1.9% expectation. July retail sales are expected to increase 0.3% versus 0.4% in June. Sales ex-autos & gas are expected to be up 0.5% versus 0.7% in June.  The Retail Sales Control Group (a direct GDP input) is expected to increase 0.4% versus 0.7% in June. Thus, expectations are for a solid report but off the strength in June and that is why third quarter GDP is expected to be slightly softer as a result.

 

4.  Preliminary U. of Michigan Consumer Sentiment – Friday

With consumer consumption two-thirds of the economy, readings on consumer confidence are always informative even if there is a bit of a “watch what they do not what they say” involved in interpreting the results. In any event, if confidence readings start to trend lower it’s definitely a warning sign that the consumer may be close to pulling back the purse-stings.  The preliminary August read from the University of Michigan is expected to be 97.0 versus 98.4 in July. The high print was a 101.4 in March of 2018 when tax cut euphoria was running high. The August print, if it comes as expected, would represent some softening in confidence but not to an alarming degree.  Inflation estimates are expected at 2.6% for the 1yr period and 2.5% for the 5-10yr horizon. The 5-10yr horizon average over the past year has been 2.5% and the Fed will want to see those expectations not drift lower by any great extent.

 

5. Second Quarter Productivity – Thursday

When one looks at the factors that drive long-run GDP growth one element is labor force growth and the other is productivity. The lament from economists during much of this expansion is that productivity has lagged the 2.0% long-run average and that has kept GDP from gaining much above that number. Some signs of increasing productivity were noted in the first quarter when it printed a solid 3.4% rate but second quarter is expected to fall back to a more typical-of-late 1.4% pace. If that expectation comes to pass it will reinforce the notion that GDP is likely to remain around 2.0% when labor force growth is in the 0.5% range.

 

 


bar graph icon  Investment Yield Ranges Over Last Year

 

US TreasuriesFHLB Agency BulletsMortgage Backed SecuritiesMunicipalsUS Corporate - FinancialsUS Agency Swap Rates 

Source: Bloomberg

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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