Tariffs, Employment & Interest Rates

Last week witnessed the major stock market averages rise over 3%. The markets are attempting to climb back to revisit the Year-To-Date highs for 2018. The S&P 500 and the Dow Jones Industrial Average are now 3.09% and 5% below their 2018 highs. The NASDAQ reached its 2018 high last Friday.

You could not turn on the Television, read the newspaper, or go on-line, without hearing various opinions of President Trump’s Tariffs on Steel and Aluminum Imports. It appears that 2% of the United States imports are for Steel, so some people are saying it’s not significant. Also, Mexico and Canada are now exempt from these Tariffs while, Members of the European Union are also seeking exempt status and China does not export a significant amount of steel to the United States. So it is now appearing that we will pick and choose who to tax. This by itself makes me a little uncomfortable.

Tariff Impact

History suggests that Tariffs are negative for the economy as prices typically rises. However, I tend to ask myself the question; does history always repeat itself, does it rhyme or can a different result be achieved? If, in the end, we end of up with more equitable trade agreements, that could actually end up being a net positive. If, however we begin a “trade war,” that would be net negative.

Employment Report

Last Friday’s Employment report (Non-Farm Payrolls) added 313,000 new jobs while the forecast was to add 205,000 jobs. The prior month was also revised higher by 39,000 jobs.

This is good news and at this stage of the economic cycle may have been viewed negatively, illustrating an economy that may be growing too fast so inflation and interest rates would be adjusted higher. However, the average hourly monthly earnings only increased by .15% instead of the consensus of .2%. This news sent the stock market averages higher last Friday accounting for much of the weekly gain.

Interest Rates

Interest rates last week rose modestly with the 10 Year US Treasury increasing from 2.87% to 2.89% for the week. In my opinion, the market is forming a new range of interest rates. Keep in mind, last year the 10 year started and ended the year @ 2.41%. The question is, what is the “new range” of interest rates? What impact will the range have on consumer and corporate borrowing? How high do rates need to climb before bonds again becoming a compelling buy?

Paul’s Take – Going Forward

This week’s economic data will feature the Consumer Price Index on Tuesday and a report of US Retail Sales on Wednesday. With earning seasons in the rear view mirror, the new weekly data, along with the direction of interest rates and anything new on the Tariff front should impact the markets in either direction.