The sentiment on Wall Street has started to sour as trade tensions weigh on the market and the uncertainty it may breed among corporate America. The tariffs against China went into effect on Friday and who knows what we will get in response over the weekend or early next week. It is only on $34B of goods and services out of $500B against China so let’s hope it is an opening bid to negotiations that level the playing field between our two countries for the long-term. Just keep in mind that the Fed will not be there to buffer volatility like it has in the past so you could see the stock market continue to see-saw.
All the action this week took place on Friday after the jobs report which sparked a rally for most of the day. Nice to have but the results were within reasonable expectations of an upside surprise so we will have to wait until Monday to see if Friday’s rally was a one day wonder or the beginning of something bigger. One thing I did not like was that 10Yr & 30Yr treasury yields were lower on Friday which tells me that the bond market doesn’t buy into the halo effect of the jobs data. There is only 30 basis points between 2 & 10 year treasury bond yields and the spread keeps narrowing. If the economy was headed to robust growth, this spread would be well over 100bps – not happening in this environment. Let’s take a look at the 10 year treasury yield index ($TNX) to see what is going on in the long end of the curve:
An inversion of the 2-10s spread would portend an economic slowdown and perhaps a recession within the next 18 months. If you need a barometer on the economy in the coming weeks – look at the bond market for a clue as the stock market is becoming less reliable.
Below is the chart of the S&P 500 ETF ($SPY). Next week’s price action will be more telling.

Chart of the Week!
Economic & Central Banking Snippets
- Some 3.4 million Americans quit their jobs in April, near a 2001 peak and twice the 1.7 million who were laid off during this time period. The trend could stoke broader wage growth and improve worker productivity, which has been sluggish in the past decade. Job-switchers saw roughly 30% larger annual pay increases in May than those who stayed put over the past 12 months. (WSJ)
- Even before a round of U.S. tariffs on China comes into force, there are signs that global trade is already cooling. Business surveys published this week show that global export growth, strong in 2017, has slowed to a relative crawl—helping to drive sharp stock-market falls in big exporting nations like South Korea and Japan. The data suggest that the synchronized world-wide growth that sustained global markets and company earnings for much of last year is already starting to run on empty. (WSJ)
- The Federal Reserve minutes from their last meeting was released this week which mentions that there is a rising concern among US business about the potentially harmful impact of tariffs as growing trade tensions prompt some executives to freeze investment plans. Some business indicated they had already “scaled back or postponed” plans for capital spending due to “uncertainty over trade policy”, while a larger group voiced concern about the impact of trade restrictions on future investment.
- U.S. nonfarm payrolls rose a seasonally adjusted 213,000 in June, the Labor Department said. The unemployment rate, drawn from a separate survey, rose to 4.0% from 3.8% in May. Wages increased modestly last month as average hourly earnings increased 2.7% over prior year data. Job growth occurred in professional and business services, manufacturing, and health care, while retail trade lost jobs. (BLS/WSJ)

Macro Snippets
- Tesla hit its production target of 5,000 Model 3s per week. 7,000 cars were produced in total when factoring in Model S and Model X vehicles. The figures follow a turbulent June that saw Tesla lay off 9% of its workforce, endure at least two fires at its Fremont plant and accuse a former employee of sabotage. (FT)
- In 747 pages of documents released to Congress, Facebook revealed it gave dozens of companies special clearance to its user data six months after it said it stopped the access in 2015. The revelations contrast with the social network’s previous public statements, WSJ reports. Details included name, gender, birth date, current city or hometown, photos and page likes.
- China’s yuan slumped to its weakest value against the U.S. dollar in nearly a year. The currency’s drop follows the imposition of tariffs and rising trade tensions between the countries. China exported $505.5 billion in merchandise to the U.S. last year while the U.S. exported $129.9 billion to China. China could run out of stuff to hit with levies while the U.S. is still warming up. Beijing, of course, has other tools, including currency devaluation, regulations and Treasury purchases. A cheaper yuan effectively makes U.S. goods more expensive in China, and Chinese goods cheaper in the U.S., erasing some of the tariffs’ impact. (WSJ)

- Turkey’s inflation soared to a 14-year high in June, increasing pressure on President Recep Tayyip Erdogan to intervene to halt steadily rising prices. According to official figures released on Tuesday, the country’s consumer price index climbed 15.4% in June driven by sharp spikes in the costs of goods and services in line with the devaluation of the lira, which has lost almost 19% of its value against the dollar in 2018. Food prices rose almost 19% during this time period. (FT)
- Shanghai-listed energy and petrochemical group Wintime Energy defaulted on a bond payment on Thursday, putting $3.9bn in oustanding bonds at risk. Chinese bond defaults have accelerated this year, leading to widening credit spreads in both the onshore renminbi and offshore US dollar bond markets.
- Samsung Electronics has projected its first profit decline in seven quarters as the strong performance of its chip business was dented by slowing sales of its premium smartphones and display panels. (FT)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital
(347) 709-9539