Trade dispute driving increased volatility, but markets continue to price in an eventual deal. The S&P 500 Index fell 0.7% yesterday and the Nasdaq fell 1.5%, pushed lower by the day’s shift in tone on trade, after the Trump administration placed strong restrictions on the use of technology from Chinese telecom giant Huawei due to strong national security concerns. Some limited relief for users of Huawei technology introduced after market close has S&P 500 futures pointing to modest gains at open. While positions are hardening on trade, we continue to expect this is largely hardball negotiating tactics, with both sides standing to benefit from an eventual deal. We continue to believe there will be a meaningful announcement on trade in 2019, but these late-stage negotiating tactics increase the potential for a mistake and risks have risen that an eventual deal may be delayed into 2020 or even 2021.
Slowing economy weighing on bond yields, but potential for reversal ahead. The National Activity Index for April put together by the Federal Reserve (Fed) Bank of Chicago signaled that the broad economy had slowed to levels not seen since 2016 but has not stalled, with March data seeing a substantial upward revision. Slower growth both in the U.S. and internationally over the last several months have weighed on interest rates and the trade dispute does raise the risk that slower growth will be extended, but recent measures of consumer confidence and a pickup in positive economic surprises in May continue to support our base case for steady growth in the second half of the year.
Dollar looks increasingly stretched. The Fed’s broad trade-weighted U.S. dollar index reached its highest level since 2002 yesterday. Currencies often reflect the relative strength of economies, and U.S. growth continues to hold up well against falling growth expectations abroad. Nevertheless, dollar strength is starting to look stretched given modest slowing in the U.S. and the potential for catch-up fiscal stimulus in key foreign economies. Dollar strength makes foreign goods less expensive for U.S. purchasers, weighing on U.S. exports, but benefits consumers by helping to keep a lid on inflation.
Rates and inflation disconnect. Global uncertainty has dominated the direction of long-term interest rates recently. Market expectations for inflation have converged with nominal Treasury yields, hinting that bond investors may be underpricing the future pace of inflation. On today’s LPL Research blog, we’ll explain the disconnect between rates and inflation expectations, and outline what camp we think will ultimately prove correct.
NEW Market Signals podcast. Listen to this week’s episode, in which Senior Market Strategist Ryan Detrick and Equity Strategist & Portfolio Manager Jeffrey Buchbinder declare the first quarter earnings a success and discuss the continuing U.S.-China tariff battle and what the effects could have on both the U.S. and world economy. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
- Existing Home Sales (MoM Apr)
- Eurozone Consumer Confidence (Preliminary, May)
- Initial Jobless Claims (May 18)
- Markit US Manufacturing PMI (Preliminary, May)
- Markit US Services PMI (Preliminary, May)
- Markit US Composite PMI (Preliminary, May)
- New Home Sales (MoM Apr)
- Kansas City Fed Manufacturing Index (May)
- Germany GDP Report (Q1)
- Markit Germany Services PMI (Preliminary, May)
- Markit Eurozone Manufacturing PMI (Preliminary, May)
- Markit Eurozone Services PMI (Preliminary, May)
- Japan CPI Report (Apr)
- Durable Goods Orders (Preliminary MoM, April)
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