by Jeffrey Kleintop, Senior Vice President and Chief Global Investment Strategist, Charles Schwab & Co., Inc.
Key Points
- This week’s data may provide early evidence that the trade tariffs are taking an actual economic toll.
- Key data by day include: Monday’s China foreign currency reserves, Tuesday’s start of the second quarter earnings reporting season, Wednesday’s rate increase decision by the Bank of Canada, Thursday’s crop report, and Friday’s China trade numbers.
- If this week brings signs of a surprisingly significant economic impact beginning to emerge, the markets may erase the modest gains seen this year for the global stocks of the MSCI World Index.
There has been a lot of speculation on what potential economic impacts new trade tariffs will have. Trade-war anxieties have been reflected in markets and surveys of both consumers and businesses, but thus far have not appeared in actual “hard” economic data. This week’s data finally offers an opportunity to look for early evidence of any actual economic toll taken by the tit-for-tat trade tariffs implemented this year:
- Monday, July 9 – Data on China’s June foreign currency reserves is released. The yuan fell against the dollar in the month of June. The statement made last week by the People’s Bank of China Governor Yi Gang that the currency had retreated enough means the data will be watched closely for any sign of authorities deploying reserves to support the currency. Although a surprisingly large drop in reserves could have rekindled concerns about capital outflows which weighed on global markets in late 2015 and early 2016, reserves only declined a less than expected $14.2 billion to $3.11 trillion in June.
Are China’s foreign currency reserves set to slide again?
Source: Charles Schwab, Bloomberg data as of 7/8/2018.
- Tuesday, July 10 – The second quarter earnings reporting season kicks off. This week features reports from global bellwethers in consumer staples, industrials, transportation, and financials. Investors will scrutinize results for any signs of tariffs impacting sales, costs, or capital spending plans. Earnings estimates by analysts for the next 12 months had trended higher for global companies during the second quarter and point to a 20% implied growth rate; any surprises could be felt by the markets.
Will tariffs begin to weigh on analysts’ rising outlook for the earnings of global companies?
Source: Charles Schwab, Factset data as of 7/8/2018.
- Wednesday, July 11 – The Bank of Canada meets, to decide on whether to raise interest rates. Markets appear to be expecting a hike to 1.5% from 1.25%. Yet, last week’s May merchandise trade data from Canada saw exports drop 0.1% overall from April with exports to the U.S. dropping 0.2%. This was the first decline in four months, taking place even before the U.S. tariffs on steel and aluminum went into effect. A vote to raise rates would show central bankers in Canada have confidence that the economic impact of trade tariffs will remain small.
Market-based probability of a July rate hike by the Bank of Canada
Source: Charles Schwab, Bloomberg data as of 7/8/2018.
- Thursday, July 12 - The latest crop estimates (World Agricultural Supply and Demand Estimates, or WASDE) from the U.S. Department of Agriculture may provide clues on the tariff impact on American crop exports. Chinese customers may have stopped making new purchases of U.S. soybeans and grains, which are being targeted with retaliatory tariffs.
Soybean prices plunged to nine and a half year lows in June
Source: Charles Schwab, Bloomberg data as of 7/8/2018.
- Friday, July 13 - Chinese trade data may reveal a slowdown in exports in June, implying the U.S.-China trade skirmish may be starting to dent actual export demand. The sentiment measured by the Caixin Purchasing Managers’ Index of manufacturing new export orders had dropped below 50 for three months as of June. The historical relationship between the PMI sub-index for new export orders and actual export growth indicates the potential for a sharp slowdown from around 10% growth to no growth at all. A reading that shows exports remained resilient in June may be welcomed by investors.
U.S.-China trade skirmish may start to dent China’s export growth
Source: Charles Schwab, Bloomberg data as of 7/8/2018.
Last week the U.S. slapped tariffs on $34 billion of Chinese imports and China was quick to retaliate. However, these are relatively small numbers relative to total imports and exports of the two countries. So far, the economic impact may be narrow, as new tariffs only cover a small percentage of imports and exports for the U.S., China, E.U., Canada and others. An escalation could result in a much broader impact. If this week brings signs of a surprisingly significant economic impact beginning to emerge, the markets may erase the modest gains seen this year for the global stocks of the MSCI World Index. Alternatively, the market could add to those gains if the economic impact is mild and threats of further tariffs becomes limited.
Copyright © Charles Schwab & Co., Inc.
