Powell

“The market is hereby ordered to go up and STAY UP!” Did you miss that tweet by President Donald Trump on Friday after his—and the market’s—frustrations with the Federal Reserve Board’s inability to heed his demands and also with China’s hard-to-understand policy of retaliating on his trade tariffs? OK, I’m being facetious. Trump didn’t order the market to rise (I’m thinking he wishes he could), but he did say this in a tweet: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA….” Firstly, short of war Trump cannot unilaterally order companies to do that without Congressional approval, so stand down. Yet market action Friday suggests investors are likely finding his tweet tantrums tedious at this point, despite the good work he’s done loosening overbearing business retarding regulations and cutting corporate taxes. (The latter was of course marred by the fact that he didn’t recover the lost taxes elsewhere and the federal budget is busting.) There stocks were cruising along nicely during the week, with the market up over 1% by Thursday and seemingly set to break the string of three down weeks. Then came the whirlwind named Trump. Investors weren’t thrilled by a Friday speech given by Fed chair Powell, who effectively said “we’ll wait and see” about future rate cuts. (For more go to page 6.) Yet the market reaction to his mild chat was muted compared to the volatility that ensued after China announced new retaliatory tariffs and after President Trump went ballistic in his threatening tweets against both Powell and China. I think the markets, with good reason, found his tweet storm a bit unnerving. The Standard & Poor’s 500 index was down over 2% Friday and fell 1.2% on the week. Though up double-digits percent this year, it is now little changed from levels first reached in January 2018. I will note that trading volumes for the week were of the traditionally low late August sort, so I don’t see a lot of conviction here, which is a plus. Government bonds rallied after China’s finance ministry on Friday said it would impose tariffs on $75 billion of U.S. goods, in two stages. The first batch would kick in Sept. 1, with the second coming Dec. 15. Let’s talk about the yield inversion of the 10-year-two-year U.S. Treasury note spread. I’ve noted before that it isn’t a particularly reliable signal. And my colleague Tom Lee produces a good refutation of the inversion signal, beginning on page 3. But here’s a recent take on this from our friends at Cumberland Advisors: “Most pundits are using the inversion of the yield curve as a forecast of a slowdown. But as we have noted in other pieces, economic slowdowns are far from synchronous with inversions. Growth continued for a year and a half after the yield curve inverted in 2006. Looking at recent economic data, it’s pretty hard to find the slowdown: – Retail sales advanced 0.7% month-over-month in July, versus an expectation of 0.3%. – The Empire Manufacturing Index (New York survey of business conditions) advanced 4.8% versus an expectation of 2.0%. – Core CPI is 2.2 % over the trailing 12-month level – right where it was at the end of December when the 10-year bond yield stood at 2.685% and the 30-year bond yield was 3.01%. – The S&P 500 and the Dow Jones are still up double digits this year – even after this week’s turmoil. – Second-quarter non-farm productivity is at 2.3% vs. a 1.4% expectation. Cumberland goes on to say: “This does not look like an economy that is rolling over. Nor is it. This is a bond market that has been buffeted by a number of factors that are not US-related.” I don’t disagree with this trenchant analysis. Even Europe isn’t completely dead. Several eurozone purchasing managers surveys suggested the eurozone economy may have stabilized in the third quarter. The eurozone economy may have started to steady in recent weeks after the flash composite Markit purchasing managers index for the eurozone rose to 51.8 in August, from a previous reading of 51.5. Over 50 suggests expansion. The eurozone service sector PMI hit a two-month high of 53.4, up from 53.2, and the manufacturing sector PMI recovered to 47.0 from 46.3, continuing to contract but at a slower pace. With all the bad news we’ve seen, I still think this looks like market resilience. Quote of the Week: You can look for Trump tweets—too much to fit here—this week on page 11. Looking Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to