Trade Tensions Trigger Stampede Out of Risk

August 2, 2019

U.S.-China trade talks do not appear to be going well, and U.S. June trade data didn’t help investor confidence that the problem may get resolved.

Stock markets and sovereign debt yields tumbled around the world, as investors ran from riskier assets. Among currencies, traditional safe havens like the yen (up 0.8% against the dollar overnight) and Swiss franc (+0.7%) attracted interest. The yuan, Aussie dollar, kiwi, sterling, and loonie slipped against the dollar, by contrast.

Share prices fell 2.7% in Hong Kong, 2.1% in Japan, 1.4% in China, 1.7% in Taiwan, and 1.1% in South Korea. U.S. stocks are down 1% or more, and losses so far in Europe amount to 3.0% in Germany, 3.3% in France, 2.2% in the U.K. and 1.4% in Spain.

Ten-year sovereign debt yields have slid 5 basis points in Italy, 4 bps in the U.S., Japan, France and Germany,.

Gold benefited from the risk aversion, jumping 1.5%, and WTI oil is 2.6% higher.

The U.S. July labor force survey was mixed and lacked major surprises. Non-farm payroll jobs went up 164K, which was very close to expectations. Unemployment stayed at 3.7%, but the labor participation rate inched up for a second straight month, which is nice. Hours worked per week dipped marginally, while on-year growth in average hourly earnings accelerated marginally to 3.2%.

Given the attention to trade strains, the U.S. trade data for June is a more telling report than the job statistics this time. The goods and services deficit remain high at $55.154 billion. Trade in goods only, which is what President Trump looks at mostly, again topped a deficit of $75 billion. Despite drops in America’s first-half deficits versus Germany, China, and OPEC, the overall merchandise trade deficit in January-June of $439.3 billion was 3% wider than a year earlier.

In other released U.S. data this morning,

  • The final July U. Michigan reading of consumer sentiment, 98.4, was the same as the mid-month finding and at a 2-month high.
  • The bx known as the NAPM index sank sharply in July to a 38-month low of 43.5 from 50.0 in June and 48.6 in May. Those three months compare very poorly with readings in the first four months of 2019.
  • U.S. factory orders grew 0.6% in June but were only 0.2% higher in the first half of 2019 on average than a year earlier.

In the euro area, both PPI and retail sales data were reported today.

  • Producer prices in the common currency area fell 0.6% on month in June, twice what was expected and the biggest decline in a half year. That depressed the 12-month rate of PPI increase to a 27-month low of 0.7% from 1.6% in May and 2.6% in April.
  • Retail sales volume in the euro area increased 1.1% in june after dropping 0.6% in May, which resulted in a 4-month high in the year-on-year increase of 2.6%.

Switzerland’s July manufacturing purchasing managers index, which was delayed a day by the country’s National Holiday on August 1, dived to a 10-month low of 44.7. This was the fourth straight sub-50 reading and down from a cyclical high in February 2018 of 65.6.

The British construction purchasing managers index rose to a 2-month high but remained distantly below the 50 neutral level with a July reading of 45.3. That’s the fifth sub-50 score in six months.

The global manufacturing PMI compiled by JP Morgan slid another 0.1 point in July to an 81-month low of 49.3. Trade barriers a very toxic to manufacturing everywhere.

Italian industrial production slipped 0.2% in June and was 1.2% lower than a year earlier. While retail sales in Italy jumped 1.9% on month, their on-year advance was just 1.3% in June.

Minutes from Japan’s Policy Board meeting in June revealed division about the merits of augmenting monetary stimulus. At the committee’s subsequent meeting in July, members agreed to toughen the rhetoric of  the guidance regarding the commitment to seek 2% inflation through all means.

Japan’s monetary base, over which the Bank of Japan exerts its most direct control, was 3.7% higher in July than a year earlier. That similar to on-year money growth in the whole second quarter but down from gains of 4.4% in 1Q, 7.3% in 2018, and 17% in 2017.

Australian PPI inflation printed at 2.0% last quarter, matching the average pace of the previous three quarters. Aussie retail sales rose 0.4% in June after a 0.1% uptick in May and a 0.1% downtick in April.

In the 12 months through July consumer prices in Thailand rose 1.0%, while producer prices fell 1.2%.

Canada experienced a C$ 136 million trade surplus in June, down from a C$ 556 million surplus the month before. There had been a deficit of C$ 778 billion in June 2018. Canadian exports and imports each were lower in June than a year earlier.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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