Hard hat area. Stocks took a wild ride yesterday opening down but getting a late session boost from a mention of a “beautiful” letter in a Trump press conference. Traders sold shares in the wake of Trump comments at a campaign rally with the threat of increased tariffs looming but things didn’t end up as bad as they could have.
WHAT YOU NEED TO KNOW:
1) Tariffs are on! With hopes still high that a deal could be reached, Trump upped the ante by allowing tariffs on $200 Billion in Chinese imports to increase from 10% to 25% at midnight last night, WHILE YOU SLEPT. The tariff increases affect almost 6000 different product categories. Tariffs on another $300 Billion in goods are reportedly in the works and could take effect within weeks. Apparently a dinner with the President, Robert Lighthizer, and Vice Chairman Liu was just that… a dinner and talks stalled. Prior to the midnight deadline stock futures were up in global trade and news of the increase caused the rally to reverse, causing a minor selloff. It is important to note that: a) discussions are still happening and can still yield a deal before any real economic damage occurs, b) many traders have already prepared their portfolios and stomachs for the tariff increase, c) it is still in the best interest of both sides to work something out. On the downside, if nothing can be worked out in the next few weeks and China retaliates as it suggested it might, things could get ugly for stocks, not to mention the economy.
2) Prices at the wholesale level are under control, still. Yesterday’s release of the Producer Price Index, which reflects prices of goods and services as they leave their place of production, reflected a minor increase. PPI includes prices charged by producers before they get into and through the retail channel and ultimately hit the consumer. Producers are the most sensitive to increases in expenses caused by rises in employment costs, material costs, and even … wait for it… tariffs. When costs of goods go up, rational companies will raise the prices of their products ultimately causing consumer inflation. Yesterday’s numbers suggest that they are not doing so just yet as the PPI excluding food and energy rose by a modest +0.1% for the month, down slightly from last month’s +0.3% rise. With the debate raging around inflation, at least one Fed governor is on the record as saying an increase in tariffs could cause inflation. More news on that with the Consumer Price Index being released this morning.
The markets spent another day in seesaw mode with an initial downward stroke only to be rescued later in the day by some obscure Presidential comments which most likely emboldened the bottom feeders to pick over the bones of the morning selloff. With the sellers out of the way, it didn’t take much to bring indexes back from the brink and stocks closed well off their session lows with the S&P500 closing down by -0.30%, the Dow Jones Industrial Average selling off by -0.54%, the Russell 2000 falling by -0.31%, and the NASDAQ sinking by -0.46%. Bonds climbed yesterday and the 10 year treasury yield fell by -4 basis points to 2.44%. Also notable is the once-infamous 3 month / 10 year yield curve which closed out the session at +1.7 basis but spent a little time inverted early in the session. By the way this means that you would only get 2 tenths of a percent more to loan your money to the government for 10 years compared to 3 months… doesn’t seem like a very good value.
WHAT TO LOOK FOR TODAY:
This morning, the Bureau of Labor Statistics will release its Consumer Price Index which reflects price changes paid by consumers, the ultimate arbiters in the inflation debate and the economy. The CPI excluding food and energy is expected to show a +0.2% monthly rise bringing the year over year figure to + 2.1% versus last month’s year over year read of +2.0%. You might recognize this as being right on the Fed’s inflation target. This morning we will hear from Marriot International and Viacom before the bell. Today’s Fed speakers are Atlanta’s Bostic and New York’s Williams who will, no doubt, be asked to comment on inflation, if not tariffs. Uber shares will begin trading after being priced at $45 a share last night, placing the company’s value at around $76 billion, slightly below its last private fund raising valuation. Next weeks economic numbers include industrial productions, housing numbers, retail sales, and sentiment while earnings season slowly winds down. For today’s trade, futures appear to be holding up after last night’s tariff increase reflecting optimism that a deal can still get done. Have a great weekend.