The last week’s market highlights:
Quote of the week:
“Success consists of going from failure to failure without loss of enthusiasm.” – Winston Churchill
Each week, we present our featured topics in the context of the major themes listed below from the Nuveen Midyear Outlook:
- U.S. economy: Running ahead of its peers.
- Global economy: Trade a bigger concern outside the U.S.
- Policy watch: Central banks aren’t all on the same wavelength.
- Fixed income: Starting to prefer higher-quality assets.
- Equities: Earnings are supporting prices, but expect plenty more volatility.
- Asset allocation: Remain risk on, but focus on quality.
Global economy: Breaking up is hard to do
The United Kingdom remained in the midst of heavy negotiations with the European Union despite announcing its intention to leave more than two years ago via the Brexit vote. The two parties still have to resolve some key sticking points ahead of the U.K.’s scheduled March 2019 departure date. These include questions over border controls between Northern Ireland, which is part of the U.K., and Ireland, which will remain in the EU.
Against this uncertain backdrop, U.K. International Trade Secretary Liam Fox, a staunch “Brexiteer,” mused last week that the odds of no deal being reached were about 60/40, even though both sides have expressed a desire to hammer out an agreement. Mark Carney, governor of the Bank of England, has also expressed doubt given the slow pace of the discussions. Currency markets reflect this pessimism, with the British pound falling to a one-year low versus the U.S. dollar last week.
British exporters have benefited from the softer currency, which makes their products more competitive in overseas markets. At the same time, consumers have felt the pain of higher inflation, the flipside of the weaker pound. As an open economy, the U.K. tends to “import” higher prices when the pound declines. This fact that wasn’t lost on the Bank of England, which, despite a middling growth outlook, elected to raise interest rates on August 2 on the prospect of rising inflation.
Since the Brexit referendum, the U.K.’s economy—the world’s fifth largest and second largest in Europe—has struggled. According to the Financial Times, economists have pegged the Brexit-induced damage to GDP growth at about 1%-2% per year. Business investment has failed to accelerate as confidence in the U.K. economy has persisted at multi-year lows. A challenging regulatory environment and brewing global trade disputes have also hurt optimism among business owners.
The U.K. got a modicum of good news on August 10, however. After rising just 0.2% in the first quarter, GDP expanded 0.4% in the second (1.3% annualized), boosted by strong service-sector activity. Thus, despite limited progress in Brexit discussions, the U.K. economy heads into the second half of the year with a “wee bit” bit of momentum. On the down side, the manufacturing sector contracted for the second straight quarter.
U.S. economy: Have tariffs hurt? The jury’s still out as anecdotes trickle in
On August 8, China announced additional import tariffs of 25% on $16 billion worth of U.S. goods, as the trade tiff between the world’s two largest economies escalated. Beijing’s move came in response to the Trump administration's decision earlier that day to slap a 25% levy on another $16 billion of Chinese imports. Both measures will go into effect on August 23.
Overall, the U.S. economy seems to have shrugged off any negative effects of the White House’s trade policy. Annualized GDP growth surged to a more than four-year high in the second quarter, and the job market demonstrated continued resilience last month. Nonetheless, there’s growing anecdotal evidence that tariffs have had a negative impact in certain sectors of the economy. Recent examples include:
- The Purdue University/CME Group Ag Economy Barometer, a nationwide measure of the health of the U.S. agricultural economy, registered its largest one-month decline in July. Sharply falling commodity prices and concerns over U.S. trade policy weighed on producers’ perceptions of both current and future conditions.
- The Wall Street Journal/Vistage study, which tracks the economic optimism of small-business CEOs, slumped to its lowest level since the 2016 presidential election. While the report suggested that fading enthusiasm over tax reform likely helped drive the decrease, it also stated that trade policy “may be the primary reason” for the drop.
- The Atlanta Fed’s “Survey of Business Uncertainty,” created in collaboration with Stanford University and the University of Chicago, elicits information about expectations and uncertainty regarding future capital expenditures, sales growth, employment, and costs. Results for July showed that only 6% of responding firms reported cutting or deferring previously planned capital expenditures in response to tariff fears. However, almost one-third of manufacturing companies indicated they have reassessed capital expenditure plans amid trade concerns.
In addition, we’ve seen news reports of individual companies, many of them small businesses, that have attributed planned cutbacks in hiring, expansion, or other expenditures to the impact of tariffs. Will such evidence flow through into empirical data? We believe that could happen if (a) companies voicing concerns about tariffs actually follow through on plans to lay off workers or delay spending, and (b) we begin to see a pickup in the number of anecdotes.
In our view, the tariffs that have gone into effect will have only a modestly negative impact on overall U.S. growth. Consumer purchasing power and the pace of capital investments should remain largely intact. However, tariffs that are still in the pipeline—announced but not yet enacted—would likely have consequences for a broader swath of products and companies, and therefore would potentially be far more disruptive.