June Economic Update
As predicted in our last newsletter, the China trade dispute took center stage in and was the dominant market driver for the month of May. Hopes for a quick resolution to the U.S.-China trade dispute faded in early as discussions broke down and rhetoric from both sides turned tough again. The disappointment lingered on Wall Street and stocks retreated from their recent highs. On Main Street, consumer confidence was strong and inflation tame. Mortgage rates reached year-to-date lows, but the latest data on home sales showed weak spring buying. The price of crude oil fell significantly, and so did the yield on the 10-year Treasury reiterating concerns for many that economic conditions may be slowing. (1)
Trade, Trade, Trade
On May 5, President Trump announced that U.S. import taxes levied on $200 billion of Chinese products would soon rise from 10% to 25% and that virtually all other goods arriving from China would “shortly” face a 25% tariff. China retaliated, declaring that it would hike tariffs already imposed on $60 billion worth of American products. In the past week, President Trump announced proposed new tariffs on Mexican imports unless the country takes drastic measures to reduce illegal immigration into the United States. (2,3)
All of these developments caused weakness in an already over-bought market which had surged off of the December 24th lows, and during the month of May which historically has been known as a bearish period. It is important to note once again that the Chinese trade negotiations are controversial, both in political and economic contexts. However, if some type of trade reform is not established with the Chinese government, they will likely become the dominant global economic powerhouse commencing sometime within the next decade.
On the flipside of that statement, China's strategy is likely to "run out the clock" leading up to the next U.S. presidential elections, causing political harm to the President and potentially forcing him to cut a deal. The stakes are very high, and of course there is no way of predicting the outcome.