Tariff Talk and Inflation Readings Top the Week Ahead

Jul 09, 2018
Beach Palm Trees Grass Huts

Post-Holiday Week All About Inflation Readings

This week inflation numbers for June will take the headlines when trade tariff news allows. PPI, CPI and Import Prices dot the calendar but it’s the CPI series on Thursday that will command the most attention.  The consumer price series for June is expected to match the prior months 0.2% gain (both core and overall) and the Core CPI YoY is expected to tick-up another tenth to 2.3% versus 2.2% in May. The numbers will certainly keep the Fed on track for quarterly rate hikes this year with the wildcard being whether tariff actions and reactions start to harm confidence readings and/or economic output. If that happens the Fed could very well pause at year-end, especially if the yield curve is flat or close to inverted.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

JULY 9–13,  2018

1.  Trade Tariff Talks/Negotiations — All Week
2.  June Inflation Readings — Wednesday/Thursday
3.  Fed Speak — Wednesday—Friday
4.  U. of Mich. July Consumer Sentiment — Friday
5.  June Import Price Index — Friday

 

 

1.  Trade Tariff Talk and Actions — All Week

With the passage of the July 6th  date marking the initiation of tariffs on $34 billion in Chinese imports, this week should again be full of tariff headlines. China has promised to follow through on retaliatory tariffs and the EU is looking to respond in kind if the Trump administration follows through on threatened auto import tariffs. Companies in China are already reporting heightened scrutiny of inbound shipments and lengthened quarantines that have caused spoilage on some agricultural products. These so-called stealth actions of the trade war carry a tangible impact. It’s this type of behind-the-headline actions we suspect will only increase. The rhetoric and tit-for-tat actions are also likely to continue and that, combined with the stealth actions, will impact global growth, but more importantly  it will increase uncertainty and hurt business confidence. All this is likely beneficial to Treasury prices as flight-to-safety trades increase.

 

2.  June Inflation Readings — Wednesday/Thursday

This week the big item apart from tariff talk headlines will be June inflation readings. The first will be wholesale price increases in the form of PPI due Wednesday while the more important consumer inflation series, in the form of the June CPI report, will be released on Thursday.  Expectations are calling for June to be up 0.2% for the third straight month. The core rate (ex-food and energy) is expected to also increase 0.2%, matching the May gain.  On a year-over-year basis, CPI is forecast to move 1/10th higher to 2.9% versus 2.8% in May while core CPI YoY is expected to inch up again to 2.3% from 2.2% the prior month.  While the core PCE is the Fed’s preferred inflation measure and remains barely under 2% at 1.955%, if core  CPI continues to inch further above 2%, core PCE will eventually get there and the Fed will continue with plans to hike rates on a quarterly basis until further notice. As we said in the opening paragraph, it won’t be inflation that slows the Fed’s hiking schedule but rather negative fallout from trade and tariff actions that may harm confidence and eventually economic results.

 

Core CPI vs. Core PCE

 

3.  Fed Speak — Wednesday to Thursday

While the FOMC minutes from the June meeting were last week’s big Fed news, this week holds a quartet of Fed speakers that will span the policy spectrum with New York Fed President John Williams speaking on Wednesday and holding down the hawkish arguments. After him, Neel Kashkari will speak on Thursday. While he’s probably the most dovish of the Fed members he is scheduled to appear on a panel discussing immigration so he may not delve too deeply into monetary policy. Philly Fed President Harker and Atlanta Fed President Bostic (both moderate doves) finish out the week  of Fed speakers. Expect the trade angle to dominant questions.

 

4.  University of Michigan Consumer Sentiment — Friday

The preliminary read on July consumer sentiment on Friday is expected to print at 98.0 compared to May’s 98.2.  The sentiment index has averaged 97.7 over the past year so a modest uptick against the average is expected. If the tariff rhetoric continues watch this series for any signs of flagging confidence. The survey also contains two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 3.0% and the longer-run expectation (5-10 years) moderately lower at 2.6%. These expectations are edging higher and the Fed will be sensitive if consumers continue to ratchet-up expectations and that could aid the quarterly rate hike schedule argument.

 

5.  Import/Export Price Index — Friday

This week is full of inflation readings for June and the week concludes with a look at the import/export price indices as well. Imports gained 4.3% in May and are expected to increase 4.8% in June as petroleum price increases drive much of the YoY gains. Export prices rose 4.9% year-over-year in May with a combination of petroleum gains and a recent stronger dollar accounting for a good share of the price gains. If the tough tariff talk continues expect these price series to lift further.

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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