Round and round it goes. Friday provided stock traders with another roller coaster ride as shares started the day down on a late night tariff hike only to roar back in the afternoon on news of progress in talks. A U-turn in stocks later in the session was engineered by a Presidential tweet capping off a wild week of trading.
WHAT YOU NEED TO KNOW:
1) Tariffs are here and there is no way of telling how long they might last. The 15% tariff increase that kicked in at the stroke of midnight on Thursday can have an effect on the economy. Despite the Administration’s carefully worded statements of how the US collecting taxes from China being a good thing is inaccurate, at best. It is well known that companies that rely on trade with China will bear the brunt of the tariffs. If a car manufacturer produces a part in China (as many do) and that part is taxed upon import, the producer will raise the price of the part thus raising the US company’s production cost. In the first round of tariffs, the 10% increase was largely borne by US companies and not passed on to consumers. Research suggests that affected companies will have a more difficult time eating this most recent increase and will likely be forced to raise their costs. On Friday, markets took the news in stride on hopes that a trade deal will still ultimately be reached before any real damage is done. Goods already in transit are not affected by the new tariff rate leaving about a two week lag period before cost increases kick in. WHILE YOU SLEPT both China and US turned up the rhetoric as Chinese state-run media slammed Trump for scuttling talks and Trump repeated his claim that China broke the deal. China is working on a retaliation that could upset markets further and the US is said to be preparing a tariff on the remainder of Chinese imports.
2) Inflation is under control… for now. According to inflation numbers released Friday by the Bureau of Labor Statistics, growth in prices paid by consumers for goods and services slowed slightly in April. The CPI showed a month over month increase of +0.3%, less than expected and down from last month’s +0.4% growth. The year over year CPI grew at +2.0% which is spot on the Fed’s inflation target. In Jerome Powell’s FOMC meeting press conference he referred to a slowdown in inflation as being “transitory”, expecting it to normalize. The comment upset traders who were hoping to hear him hint about future rate cuts. Though Friday’s inflation number doesn’t provide us with any clue either way it does suggest that inflation remains under control. Moreover the Fed is unlikely to raise rates while the trade war rages on with China.
Friday was another one of those days in which markets start the day at one extreme and close out the day on an opposite one. Stocks opened well in the red on Friday in response to the tariff deadline but late in the day as trade talks concluded for the week and participants began to describe the talks as being “constructive”, stock traders gained hope. Finally a tweet by the President gave the market the boost it needed to send stocks into the green for a positive close. The late day rally did not help Uber shares which began trading on Friday. Shares of the ride sharing company opened below its $45 IPO price and spent the session in the red. The stock did make some attempts to rise early in the day, though the moves were unsustainable and shares ultimately closed down by -7.62%. Stocks indexes closed up after their late session comeback with the S&P500 closing up by +0.37%, the Dow Jones Industrial Average trading up by +0.44%, the Russell 2000 ticking up by +0.19%, and NASDAQ 100 rising by +0.05%. Ten year treasury yields traded up by +2 basis points to 2.46% and the 3 month / 10 year yield curve widened out to +4 basis after having inverted intraday on Thursday.
WHAT TO LOOK FOR TODAY:
We will get no major economic data today and earnings season is winding down leaving us with no major pre-market releases. Post close we will hear from Legg Mason and game maker Take-Two Interactive. Fed governors Rosengren and Clarida will speak today. The vacuum caused by today’s lack of quantitative data will leave traders to debate the reality of last week’s tariff hike and to re-assess their late session optimism on Friday. Also today we can expect to hear more about Uber’s lackluster IPO as investors set their eyes on the remaining herd of Unicorns lining up to go public.
WHAT TO LOOK FOR IN THE WEEK AHEAD:
The week starts off slowly with economic releases kicking in on Wednesday which include Retail Sales, Industrial Production, and the NAHB Housing Index. Later this week we will get Housing Starts, Building Permits, the Conference Board’s Leading Index, and University of Michigan’s preliminary Sentiment Index. Earnings season winds down this week with nine S&P500 companies reporting. Please refer to the attached earnings and economic release calendars for details.