Monday Musings: October 7, 2019

Oct 07, 2019

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Public Trust Credit Team
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All roads lead to Beijing

Trade talks between the U.S. and China are set to continue at a principal-level meeting between the two countries on Thursday and Friday. News ahead of the meeting have been mixed. On one hand, China has materially stepped up soybean imports from the U.S. ahead of the talks. On the other hand, a Bloomberg report this weekend showed that China was significantly narrowing the focus of the negotiations which threatens to derail any sign of progress. Specifically, China has said that it will not negotiate on reforming industrial policy or government subsidies, both of which have been key areas where the U.S. is seeking concessions. It is likely that the looming impeachment inquiry has weakened the Trump administration’s hand in the eyes of Beijing and led to the narrowing of the topic list. Market participants surely will be looking toward the outcome of the talks this week, though Public Trust does have high expectations for an agreement to be reached at this time. Our industrials and technology universe remains the most exposed to the trade fight; however, should the new round of December tariffs be implemented as is, broadly all consumer sectors will be affected.  

U.S. unemployment reaches a 50-year low as employers continue to add jobs to the economy

The U.S. Bureau of Labor Statistics released its employment data last Friday, showing the unemployment rate dropping to 3.5% in September from 3.7% in August and signaling the lowest rate since 1969. The Labor Department reported that employers added 136,000 jobs in September. Additionally, payrolls for August and July had combined upward revisions of 45,000 over what was previously reported. Job growth has averaged 161,000 per month so far in 2019 in comparison with an average monthly gain of 223,000 in 2018. Still, the most recent manufacturing data shows that the ISM Manufacturing Index fell further into contraction in September, declining to 47.8 (below the 50 threshold for expansion), the lowest in a decade after August numbers of 49.1. With mixed economic data and continued uncertainty surrounding the U.S. – China trade war, the possibility of an additional rate cut by the Fed before month end remains strong. The current implied probability of a rate cut at the Fed’s October 30, 2019, meeting is at a high 72.9%.

Civil unrest in Hong Kong intensifies as government proves incompetent in curbing violence

Today marks the fourth day since the Hong Kong government used emergency powers for the first time in nearly half a century in attempt to subdue violent protests that again left the Chinese territory in disarray over the weekend. The government’s efforts to force protestors off the streets by using emergency powers to officially outlaw face masks may have had the opposite effect as large numbers of civil activists flooded popular shopping centers and subway stations, leaving police outnumbered and unable to contain the disorder. The protests are beginning to have a severe effect on the Hong Kong economy. The government has already slashed its 2019 GDP growth forecast to a range of 0% – 1% from its previous estimate of 2% – 3%. Retail sales volume for the month of October came in at -25.3% YoY, significantly worse than the survey of -17.8% as local businesses and shopping malls have been forced to close their doors in the midst of all the chaos. Given protestors’ increasing frustration with the government’s unwillingness to address what they believe to be unjustified police brutality, it is unlikely that violent demonstrations will come to a halt anytime soon.
 
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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