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The U.S./China trade war, and its fallout, dominated business news this week.



Comerica Economic Weekly, August 9, 2019

August 9, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

The U.S./China trade war, and its fallout, dominated business news this week. Late last week the Trump Administration threatened to impose tariffs of 10 percent on $300 billion worth of previously untaxed imports from China. Earlier this week the Chinese renminbi lost value, breaking the 7 renminbi per dollar boundary.  

Adding to the growing international wall of worry, Germany posted weak industrial production data for June, showing a dip in output of 1.5 percent for the month, and a loss of 5.2 percent over the previous year. Some analysts predict another bad IP number for July. 

U.S. and global stock markets sold off this week and money piled into sovereign bonds. The yield for the 10-year Treasury bonds dipped to a low of 1.62 percent on Wednesday, near the monthly yields from the summer of 2016. A more steeply inverted yield curve added to concerns about the U.S. and global economy. 

As a result of increased financial market volatility this week, pressure is building on the Federal Reserve to follow up the late-July fed funds rate cut with another one in mid-September. 

According to the CME Group, the implied probability of a fed funds rate cut on September 18 is 100 percent, weighted about 2-to-1 in favor of another 25 basis point cut to a range of 1.75-2.00 percent, with the remainder expecting a 50 basis point cut. 

St. Louis Fed President James Bullard said on Tuesday that “additional policy action may be desirable.” Chicago Fed President Charles Evans’ comments on Thursday were supportive of another rate cut this year.

We continue to expect additional monetary policy easing by the Fed this year. Even though the fed funds futures market collectively expresses near certainty for a September rate cut, we believe that the Fed itself is not yet ready to make that call. 

Federal Reserve officials will meet at their annual Jackson Hole Economic Symposium over August 22-24. This will help them to get on the same page for their public commentary over the following two weeks. We await Fed commentary after Jackson Hole and prior to the ten-day blackout period for Fed communication which will begin on September 7. 

U.S. economic data was mixed again this week. 

The ISM Non-Manufacturing Index for July decreased from a moderate 55.1 to a still-positive 53.7. The trend in both the ISM Manufacturing and Non-Manufacturing Indexes has been down since late last year (see graph on page 2). The ISM Manufacturing Index may well go into negative territory before the end of this year. That would not necessarily imperil the ongoing economic expansion. However, if the ISM Non-Manufacturing Index were to drop below 50 that would be a very strong recessionary indicator. 

The Job Opening and Labor Turnover Survey (JOLTS) for June showed a small step down in the job openings rate, to 4.6 percent. It is too early to say that we are definitely past the peak rate for job openings, at 4.8 percent in late 2018, but that may end up being the case. The hiring rate was unchanged at a strong 3.8 percent. 

Initial claims for unemployment insurance fell by 8,000 for the week ending August 3, to hit 209,000. The level is low and the trend is down, so no problem here. Continuing claims dropped by 15,000, to hit 1,684,000 for the week ending July 27.

The Producer Price Index for Final Demand increased by a modest 0.2 percent in July. Both the PPI for Final Demand and Core PPI (less food, energy and trade) were up by 1.7 percent in the 12 months ending in July.

For a PDF version of this publication, please click here:  Comerica Economic Weekly, August 9, 2019

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