Markets continue to follow trade news; tone improves overnight after a rough week. Global equity markets advanced overnight and U.S. futures point to a higher open after the Trump administration signaled that some relief from restrictions on Chinese telecom giant Huawei could be part of a final trade deal. Weakening global and U.S. economic data and increased market volatility may be helping to nudge the U.S. and China back to the negotiating table. Market participants will be focused on seeing enough progress over the next several weeks for President Trump and China’s President Xi to potentially get talks back on track at the G-20 Summit on June 28-29.
U.S. economic data showing increasing bite from trade disputes. Markit’s preliminary manufacturing Purchasing Managers’ Index (PMI) for May fell to a nine-year low at 50.6 but remained in expansion territory (above 50 indicates expansion), as trade uncertainty continued to weigh on the manufacturing sector. New orders, a strong leading component, entered outright contraction, also hitting a nine-year low. The services index faired only slightly better, falling to 50.9. The U.S. economy has shown strong resilience so far in the face of hardline trade negotiations, with fiscal stimulus more than offsetting the impact of trade headwinds, but signs that the U.S. would also be vulnerable to a protracted dispute are increasing.
Durable goods orders weaken. Durable goods orders for April fell over 2% with a strong downward revision to March’s data as trade uncertainty continues to weigh on business spending. New orders for core capital goods, an important leading indicator, also declined, missing expectations at -0.9%, with March being revised downward into contraction territory. Fiscal incentives to increase capital spending continue to be undermined by uncertainty around trade and slowing global growth. With strong fiscal incentives in place, we believe business spending is primed to rebound if trade tensions subside, which would be the key to further improving productivity and elongating the cycle.
British Prime Minister May resigns, extending Brexit uncertainty. Theresa May has resigned her post as Britain’s prime minister after failing to broker a Brexit deal satisfactory to both her own fractured parliament and the European Union. The already chaotic Brexit process enters a new stage of uncertainty with everything back on the table, from a second referendum potentially cancelling Brexit to a risky accelerated departure. The direction will be framed by the U.K.’s next prime minister, with pro-Brexit candidate Boris Johnson leading the field. The current deadline for a Brexit deal with the European Union is October 31.
- Durable Goods Orders (Preliminary MoM, April)
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