September 6, 2019 – Stocks had another week of modest gains. The S&P 500 did break out of the trading range where it spent all of August, which is good, but the trade situation and global economy both remain causes for concern.
We’ll get to trade first, as the news that trade talks are now scheduled for October helped push stocks out of the range they traded in for all of August. Low-level talks will happen later this month, while higher-level talks, which previously were expected to be held this month, are now planned for October. Even today, White House economic adviser Larry Kudlow said a definite date has not been set. The chance of a deal is obviously much higher if talks happen than if they don’t, but given the seeming difficulty of even getting something on the calendar, it doesn’t seem like the two sides are particularly close to reaching a deal.
Kudlow also hinted that additional tariff increases could be coming if the the U.S. doesn’t see results from the upcoming meetings. Of course “results” was not defined, and talks have been described as “making progress” any number of times over the past 14 months and we have yet to see anything, except for higher tariffs.
The U.S. isn’t alone in raising tariffs. China is also taxing imports from the U.S., while also lowering tariffs on imports from elsewhere. This amplifies the effect of making U.S. products less competitive in the Chinese economy.
It is hard to measure how much Chinese tariffs are hurting U.S. manufacturers but the ISM manufacturing index released this week showed the manufacturing sector is actually contracting. This may be due to China’s tariffs, but is also likely partially attributable to slowdowns in economies around the world. The manufacturing sector isn’t as big a part of the economy in the U.S. as it once was, so this is less worrying than it would have been some years ago, but even so it isn’t great.
Friday’s jobs report continued the recent theme in economic data of things being generally healthy, but starting to show some signs of weakness at the margins. The number of jobs added during August fell short of estimates and below the recent trend. This month’s hiring included 25,000 workers hired into temporary positions by the federal government as part of the 2020 Census. Those were likely included in the forecast numbers, but weren’t part of the recent trend, which makes the drop in hiring appear even sharper. The good news is that wages continue to rise, which has been a missing piece of the puzzle for much of the post-Financial Crisis recovery.
That jobs report gives Jerome Powell and the Federal Reserve a reasonable argument for cutting rates when they meet later this month. At this point a cut of some size seems all but certain. Our guess would be another 25 basis points, but some members of the open markets committee have suggested 50 could be on the table.
In remarks today, Powell said the central bank foes not foresee a recession, but he added that the Fed has limited experience using monetary policy to try to limit the effects of “trade-policy uncertainty”.
Inflation data next week could give the Fed more ammunition for a cut, but if it shows prices rising due to tariffs, or for some other reason, the Fed will likely have a harder time lowering rates.
On the week, the S&P 500 gained 1.79%, the NASDAQ gained 1.76%, and the Dow Jones Industrial Average gained 2.60%.