The WMA Weekly Market Wrap v.180807

August 7, 2018

One Trillion Dollars

The broader U.S. stock market benchmarks were generally positive last week as Apple led the information technology sector out of a brief slump. Mid-cap stocks performed the best, while the narrowly focused Dow, which tracks 30 large-cap companies, lagged. Traders were focused on a slew of second-quarter corporate earnings reports that were released during the week, but macroeconomic news was generally supportive. An escalation of the trade dispute between the U.S. and China seemed to have minimal impact on U.S. equity markets.

A sell-off in tech stocks from the previous week carried over into trading on Monday.

However, on Tuesday, Apple delivered its best-ever revenue for what is typically its weakest quarter, as demand for iPhones remained resilient and services such as app-store sales swelled to a record. Fortunately for Apple, deep-pocketed smartphone buyers don’t appear to have gone on summer break. The stock (and all techs) rallied, and the company, which already held the crown as the nation’s most-valuable company, made Wall Street history Thursday when it became the first publicly traded U.S. corporation to reach a market capitalization of $1 trillion. Its capitalization is bigger than the economies of all but 17 countries in the world. Now the business founded by Steve Jobs and his pal Steve Wozniak in a Los Altos, California garage in 1976 truly stands alone.

U.S. milestones: $1 Million: Bank of North America; $10 Million: Bank of the United States; $100 Million: New York Central Railroad; $1 Billion: AT&T; $10 Billion: General Motors; $100 Billion: General Electric; $1 Trillion: Apple.

The U.S. turned up the heat Wednesday on China, with the Trump administration threatening to more than double, from 10 to 25 percent, proposed tariffs on $200 billion of Chinese imports while Congress passed a defense bill designed to restrict Beijing’s economic and military activity. The proposed tariff increase poses big risks for both the U.S. and global economy. A 25 percent tariff would boost the cost of a range of U.S. imports at a time when inflation has begun to pick up. It would become another factor for the Federal Reserve to consider as it decides how quickly to raise interest rates. Higher-than-anticipated tariffs could also encourage Beijing to let the yuan slide even further, raising the prospect that a trade fight turns into a currency battle. China responded by threatening to tax another $60 billion worth of U.S. imports. Therefore, nearly half of America’s annual imports from China could soon come with a 25 percent tax, the end result of tariffs affecting everything from individual consumer buying decisions to long-term corporate investments.

American consumers are already seeing higher prices for recreational vehicles, soda, beer and other goods that now cost more to make because of recent tariffs on metals and parts. U.S. almond farmers, meanwhile, are getting crunched. Prices for California almonds have fallen by more than 10 percent over the past two months. U.S. steel prices have risen 33 percent since the start of the year, as producers and their customers begin to price in tariffs the Trump administration first applied on foreign-made metal in March. Coke took the unusual step of raising soda prices midyear in North America because of rising costs, including freight rates as well as prices for plastic and aluminum. Motorcycle prices are going up due to tariffs too.

The monthly jobs report and a Federal Reserve monetary policy meeting were the highlights of the week’s economic calendar. Friday’s nonfarm payroll report came in below expectations as employers added 157,000 jobs in July, but totals for May and June were revised up by a combined 59,000 and the unemployment rate ticked down to 3.9 percent. Employment growth, which is averaging 215,000 jobs a month for the year-to-date period, has accelerated from 2017 and is nearly double the pace needed to absorb labor force entrants over the medium term. Average hourly earnings increased 2.7 percent from the same period last year, the same pace of growth seen in June’s jobs report.

As expected, the Federal Reserve kept its short-term interest rate benchmark in the 1.75 to 2.00 percent range at the conclusion of its two-day monetary policy meeting on Wednesday. In its post-meeting statement, Fed policymakers changed their description of the economy from “solid” to “strong,” and the futures market is pricing in a high probability of a 0.25-percentage-point rate hike at the Fed’s September meeting. According to Capital Economics, for only the second time this century, the Fed described economic growth as “strong.” The other time was May 2006, just after the GDP posted a 5.4 percent annualized increase.

“Projected trillion-dollar federal deficits are prompting the U.S. Treasury to increase its borrowing substantially, which could restrain a fast-growing economy as the cost of credit also rises,” The Wall Street Journal reported last week. The government is likely to run trillion-dollar deficits for the next four years, according to Office of Management and Budget projections released last month. Even so, the yield of the benchmark 10-year U.S. Treasury note was little changed for the week. The 10-year yield was at 3.00 percent as news of increased U.S. borrowing. However, the Bank of Japan’s decision to keep its accommodative monetary policy in place and concerns about rising trade tensions increased demand for safe-haven securities and helped drive yields lower by the end of the week.

European equities ended last week lower as rising trade tensions between the U.S. and China once again weighed on the markets there. Traders were apparently nervous about the Trump administration’s threat to raise tariffs and equally concerned that China would retaliate – which it did on Friday. Germany’s DAX 30 index fell about two percent on the week, leading losses across Europe’s major indexes. Germany is a major exporter, and the DAX has been highly sensitive to global trade uncertainty. The pan-European index STOXX 600 declined nearly one percent.

The Chinese yuan posted its eighth weekly loss as trade tensions with the U.S. showed no sign of easing, stoking worries that the deepening rift would weigh on China’s slowing economy. The yuan hit a 14-month low on Friday and gave up nearly a percent for the week, pushing the currency closer to the psychologically important exchange rate of 7 yuan per U.S. dollar. The yuan’s eighth straight week of declines marks its longest losing streak since China created its current exchange rate regime in 1994. Chinese stocks lost ground accordingly. Meanwhile, elsewhere in Asia, Japanese stocks gave back all of July’s gains last week.

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