Negotiations on a U.S. - China trade agreement hit a snag; U.S. inflation continued its sluggish pace in April; South Africa's election was a qualified victory for the ruling ANC.
“It is hoped that the U.S. and Chinese sides will meet each other halfway and work together”
U.S. – China: Tariff Tumult
The U.S. raised its tariffs on $200 billion worth of goods it imports from China from 10% to 25% just as China’s top-level trade negotiation team arrived in Washington for meetings that some U.S. observers had speculated might feature a signing ceremony on a wide-ranging, historic trade agreement.
There will, however, be a delay in the full impact; the White House has effectively delayed the increase by saying it only applies to goods that leave China on Friday, May 10 or afterward. Oceangoing goods already on their way to US ports would be subject to the 10% tariff policy.
Financial markets reacted mostly negatively during the week, with the S&P 500 down as much as 3.8% off its highs the previous Friday, May 3. But reaction was muted in the immediate aftermath of President Donald Trump’s announcements of a breakdown in talks late Wednesday and Thursday, May 8-9, blaming China for the impasse. Wednesday saw the S&P 500 rise just under 0.2% from Tuesday’s close, and Thursday saw it rise 0.4% from its opening price – though the index ended the day down some ‑0.3% from Wednesday’s close.
China’s official reaction to Thursday’s announcements and speeches was represented by an article in several outlets, including the Xinhua press agency, with the headline “If You Want to Talk, We Can Talk. If You Want to Fight, We’ll Fight”.
U.S. slow-flation: “Transitory”?
April’s core consumer prices (core CPI) rose 0.1% since March, vs. expectations of 0.2%. Including food and energy, the rise was 0.3%, also falling short of expectations. Year-on-year, core CPI rose 2.1%, in line with forecasts.
The slight shortfall challenged Fed Chair Powell’s assessment during the FOMC’s May 1 press conference that sluggish inflation was due to “transitory” factors. Financial markets appeared to agree, if briefly; the yield on the 10-year Treasury fell to as low as 2.4334 at 8:30 AM, the time of the announcement, and the market for Fed Funds futures saw a slight increase in the odds of a Fed rate cut by the end of 2019.
Emerging Markets: South Africa election
Investors in emerging markets received some welcome positive political news; the early results of South Africa’s hotly-contested national election showed the ruling African National Congress (ANC) receiving a majority of about 57% of the vote, with 90% of ballots counted. The results were seen by many as a generally favorable verdict on the sitting government’s ongoing efforts to end what is widely regarded within South Africa as rampant corruption and economic stagnation.
But the results fell short of complete vindication. Voter turnout may end up being the lowest since the end of Apartheid in 1994, and the opposition Economic Freedom Fighters (EFF) received about 10% of the vote, doubling the number of its seats in the National Assembly, and making gains in all nine provinces. The EFF platform includes controversial land reform measures. The moderate Democratic Alliance, conditionally supportive of the ANC, lost some ground.
Financial markets treated the news as broadly positive. The South African rand rose as high as 14.18 per U.S. dollar; the 10-year sovereign bond yield fell to as low as 9.05% and South African credit default swaps improved, tightening 9.35 basis points to 184.9.
All dcata Source: Bloomberg, May 10 2019, 9:00 AM ET, unless otherwise indicated.
The Consumer Price Index (CPI) measures the average change in U.S. consumer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.
The Core Consumer Price Index (Core CPI) excludes the prices of food and energy, which are volatile on a monthly basis, from the basket of goods used to determine the CPI.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Federal Funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.
A credit default swap (CDS) is designed to transfer the credit exposure of fixed income products between parties.
One basis point is one one-hudredth of a percentage point.