Trade Tensions Remain in Spotlight

Sep 04, 2018
US China Flags

Trade Tensions Will Remain Focus This Week

In this holiday-shortened week the focus will remain on trade tensions, and with last week’s late disclosure of a possible $200 billion in additional tariffs on Chinese goods, a reaction from our largest trading partner should be the key tone-setting event. Emerging markets have reemerged as a potential sore spot and that contributed to the bullish bid in Treasuries of late and this is likely to continue. Despite the tone-setting coming from the geo-political sphere, the data calendar has some solid first tier releases headlined by the August Employment Report. The key metric will be average hourly earnings as consumers, investors, and the Fed look for evidence that the exceptionally low unemployment rate, and tighter labor market is beginning to generate higher wages.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

SEPT. 4 - 7,  2018

1.  August Employment Report — Friday
2.  Trade Negotiations and Emerging Markets — All Week
3.  August ISM Surveys — Tuesday/Thursday
4.  July Trade Balance Deficit — Wednesday  
5.  July Factory Orders — Wednesday

 

 

1.  August Employment Report — Friday

The August jobs release is expected to improve over July’s somewhat soft print with monthly job growth of 195,000 versus 157,000 the prior month with the unemployment rate ticking lower to 3.8% from 3.9%. The monthly average gain in jobs over the last year has been 199,000 so the August print is expected to be just under the average but an improvement off the weaker-than-expected July headline print.  Once again, average hourly earnings will be the key metric and it’s expected to increase 0.2% MoM versus 0.3% in July .  Year-over-year average hourly earnings are expected to remain at 2.7% for the fourth straight month indicating little upward movement in wage gains.   The average over the past year has been 2.6%YoY, so a slightly above-average print is expected but once again one that fails to signal the hoped for acceleration in wage growth that workers and the Fed are looking for.

 

2.  Trade Negotiations and Emerging Markets — All Week

Emerging markets and trade  developments will continue to override most of the economic releases this week, especially with the  latest salvo of an additional $200 billion in tariffs on Chinese goods launched last week by the Trump administration. That should prompt some type of tit-for-tat response from the Chinese which should continue to underpin the bid for Treasuries. In addition, the emerging market currency crisis has reemerged with Argentina stealing the headlines from Turkey with a nearly 20% decline in the peso last week. With the Fed set to hike later this month, and thus keeping the pressure on foreign currencies, it’s likely the crisis will continue. It all seems to infer a positive backdrop to long-term Treasuries and our curve flattening call.

 

3.  August ISM Surveys — Tuesday/Thursday

The August ISM Manufacturing Survey is due on Tuesday followed by the non-manufacturing, or services, survey on Thursday. These two August readings, combined with  the jobs report, will provide a good look into economic results for the month. The manufacturing survey is expected to print 57.6 versus 58.1 in July.  Anything above 50 represents an expanding sector so the survey is likely to show continued strength in the manufacturing sector, albeit with some recent moderation.  The average over the past year has been 59.1 so the August result should show a slight decrease versus the yearly average.  The non-manufacturing (services) survey is due Thursday and the forecast is for it to move slightly higher to 56.8 versus 55.7 in July. The average over the past year has been 58.0 so a miss on the twelve-month average but well above 50 indicating an expanding sector representing nearly 90% of the economy.

 

ISM Manufacturing / Non-Manufacturing

 

4.  July Trade (Goods and Services) Balance — Wednesday

With trade war rhetoric remaining front and center the monthly look at trade deficits has become equal parts political and economic.  The trade deficit (goods and services) was -$43.6 billion in July 2017 and is expected to be –$50.2 billion in July 2018. The deficit began the quarter at  -$46.4 billion, so the expected widening to -$50.2 billion indicates the trade sector will subtract from third quarter GDP if the July widening of the trade deficit persists throughout the quarter.

 

5.  July Factory Orders — Wednesday

The monthly Factory Orders Report isn’t a first-tier release by any stretch but given the trade tariff talk and anecdotal reports of slowing activity in some goods sectors stemming from  tariff uncertainty this report takes on additional significance. For July, orders are expected to be down -0.6% but that comes after an increase of 0.7% in June.  Orders ex the volatile transportation sector are expected to be up 0.4% matching the June increase.

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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