All the Major Inflation Reports will be in the Spotlight

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Coffee and Economic Review

The imposition of tariffs by the United States and China on billions of dollars of trade was absorbed calmly by markets on Friday with stocks edging higher, but concerns about the conflict escalating capped gains. Chinese stocks led a recovery by the Asian markets, partly helped by the perception the tariff measures were already priced in. Worries about what lay ahead for global markets did boost the appetite for perceived safe-haven assets such as government bonds. World stocks rose 0.2% to the highest level in a week. Copper, seen as a barometer of the world’s economic strength fell to a one-year low.

  U.S. stocks climbed on Friday and the Nasdaq and the S&P 500 hit their highest level in two weeks, as strong U.S. jobs growth blunted the impact of an escalating U.S.-China trade dispute. The Dow Jones rose 99.74 points on Friday and finished the week 0.7% higher. The S&P gained 23.14 points on Friday and ended the week up 1.5%. Although U.S. stocks appeared minimally affected by American and Chinese tariffs going into effect, some investors warned that prolonged trade tensions could roil the markets, as they have on several occasions this year. Investors worry the trade conflict with China could make companies delay plans for capital expenditures. The main concern is the supply chain as so many little parts for almost everything is manufactured in China. There could be a real hold-up in manufacturing because of the tariffs. Second quarter earnings growth is expected to be robust, but trade exposure will impact the financial markets going forward.


Economists estimate that for every $100 billion of imports affected by tariffs reduce 0.5% of global trade, wiping out 0.1% of global GDP growth. The direct impact on China’s growth in 2018 is estimated at 0.1% to 0.3%. The drag on its export growth is estimated at 1%. Global inflation will rise by 0.1% to 0.3%, not counting currency volatilities. Uncertainty about trade could make banks wary of their exposure to affected industries and hurt the price and flow of credit. Business executive are likely to hold back on investment. The pass through could affect domestic demand and consumer confidence. Volatility in financial markets hurts all of the above. A model by Pictet Asset Management estimates that a 10% tariff on U.S. trade fully passed on to consumers could tip the global economy into stagflation and knock off 2.5% of global earnings globally.


On Friday, a day the U.S. ratcheted up trade tensions with China, new data showed the trade deficit fell to the narrowest in 19 months and growth in employment was strong. U.S. nonfarm employment grew by 213,000 jobs in June and May had upward revisions. Employment has grown by 215,000 a month this year compared to 184,000 in 2017. Average hourly earnings were unchanged at 2.7%. The important point was that there is still slack in the labor markets and concerns that the labor markets will overheat soon are overdone.

  The trade deficit narrowed from $46.1 billion in April to $43.1 billion in May. Soybean exports jumped by $2 billion to $4.1 billion. This jump was front-loaded and will soon fade. Soybeans will show up in the June report, but July and August will be a different story. Activity in the factory sector remained strong in June as the ISM manufacturing index increased to 60.2. Production and employment made solid gains. Factory orders also showed some strength, rising 0.4% in May. Core capital goods orders were strong. Construction spending rose 0.4% in May and remains on a solid upward trend. Barring trade tensions, the economy looks solid. The Fed’s Open Market Committee noted n its June minutes that the central bank is very upbeat about the economy but is concerned about trade tensions, more so than even the flattening yield curve. Participants were concerned that trade policy had intensified and members were concerned about uncertainty and risks that could have negative effects on business sentiment and investment spending. Fewer members are seeing risks weighted to the upside.


The upcoming week is lighter on economic data. The small business optimism report will be released.   All the major inflation reports will be in the spotlight. Trade tensions will be on the front burner and financial markets will be looking for any softening of rhetoric, which is unlikely. The U.S. economy has a full head of steam and it would take a lot to derail the train. Trade just may do it.

Latest Data

The U.S. Economy:

U.S. construction spending increased 0.4% in May, following a revised 0.9% advance in April and a 0.9% decline in March. The May rise was again broad-based, with advances from private residential and public spending. Residential construction spending rose 0.8% in May, up 6.6% from a year earlier. Spending o single-family homes was up 0.6% m/m and 8.2% year-over-year. Spending on multifamily structures rose 1.65 from April and is up 4.2% y/y. Nonresidential construction spending fell 0.3% in May, following a 0.4% rise in April. Of the largest components of private nonresidential construction, spending on utilities and power structures increased 2.4% m/m, but fell 1.7% for the year. Spending on commercial structures fell 2.8% m/m, but were up 5.2% y/y. Public construction spending rose 0.7% in May and is up 4.75 year-over-year. Residential construction is still on the rise, but capacity restraints are a concern as the search for ore labor becomes difficult. Spending across manufacturing, commercial and healthcare facilities remains weak. Public construction has been strong the last few months.


The ISM manufacturing index rose to 60.2 in June, up from 58.7 in May. Historically, readings above 60 are difficult to maintain. Details were favorable. The production index 61.5 to 62.3, with 16 industries reporting an increase in production in June. The new orders index slipped from 63.7 to 63.5. Sixteen out of 18 industries reported growth in new orders including textile mills, furniture, wood products and printing/related support activities. The inventory index rose from 50.2 to 50.8. Supplier deliveries jumped from 62 to 68.2. This was the highest reading since 2004. According to the ISM, lead-time extensions for production materials, transportation delays and ongoing uncertainty in the steel and aluminum industries continue to restrict production output. The employment index slipped from 56.3 to 56. New export orders increased from 55.7 in May to 56.3. Import orders rose from 54.1 to 59. The prices paid index slipped from 79.5 to 76.8. Among commodities up in price were aluminum, caustic soda, cobalt, copper, corrugated boxes and steel. No commodities were down in price. It would take a lot to derail the U.S. economy because of the sugar high from the fiscal stimulus but the developing trade war is a mounting threat.


U.S. vehicle sales came in at an annualized pace of 17.5 million units in June, up from 16.9 million in May. Sales were up 4.6% above the June 2017 level. With the second quarter in the books, sales averaged 17.18 million, a slight decline from the first quarter’s 17.24 million pace. Light truck demand remained historically strong, marking the fourth straight month in which light truck sales reached two-thirds of sales. Fleet sales had a small decline from year-earlier levels. Incentive spending fell slightly in June compared earlier in the year. The average year-to-date stands at $3,900, while June averaged $3,750. The share of zero-financing has almost halved compared to a year ago, accounting for only 5.6% of total sales. The average rate was 5.82% on new vehicle purchases, compared to 4.96% in June last year. Auto credit will be a more significant headwind as the year progresses and domestic banks have been tightening loans. Still employment and wage gains will support the market to near 17 million.


Factory orders increased 0.4% in May, following a 0.4% decline in April and a 1.75 advance in March. Transportation orders fell 1.1% in May, but are up 12.1% y/y. Aluminum and steel tariffs have emerged as key risks for the industry. Nondurable goods advanced 1.1% in May, while durable goods orders fell 0.4% in May. Core capital goods orders increased 0.3% in May, following a 2.0% increase in April. Total factory shipments rose 0.6% in May. Inventories were up 0.2%. The inventory-to-shipments ratio was unchanged at 1.35. Factory orders surprised to the upside in May, largely driven by machinery orders. That bodes well for productivity advances. Trade tensions will remain a key source of risk for U.S. manufacturers. The tariffs on steel and aluminum have drawn retaliation form U.S. trading partners. The EU has responded with their set of tariffs. A trade war between the U.S. and China could have dire consequences for the global economy.

  The ISM non-manufacturing index increased from 58.6 in May to 59.1 in June. The details were mostly favorable. The business activity index rose from 61.3 to 63.9. Sixteen industries reported growth in business activity, among them mining, construction educational services and retail. New orders rose 2.7 points to 63.2. Seventeen industries reported growth in new orders. The employment index slipped from 54.1 to 53.6. Supplier deliveries slipped from 58.5 to 55.5. Respondents’ comments included a backlog from a capacity crunch, trucking issues and rail and truck availability issues. Growth in the non-manufacturing segment of the economy improved in June, but there are very few sectors of the economy not doing well. Trade was mentioned among participants. A respondent noted that the tariffs on steel and aluminum are causing worries about pricing. Transportation is another problem although supplier deliveries improved during the month. The service economy will continue to do fine, but trade is a big risk.


The trade deficit narrowed by $3 billion in May to equal $43.1 billion. May marked the smallest trade deficit since late-2016. Details were largely positive. The combined goods and services exports rose 2.6% and 0.6%, respectively. Performance was mixed across goods exports, with a 14.1% surge in foods, feeds and beverages, but industrial supplies dropped 2.8%. Goods imports rose 3.6% m/m, with gains in the foods category and automotive imports contracted 1%, the third consecutive decline. Soybeans were the standout item in the report, nearly doubling from the previous month. Exporters were trying to front load exports before Trump’s tariffs triggered retaliation by China. Soybean exports will remain strong in June, but will fall sharply in July. Although the $34 billion in tariffs is small, there are no signs that the escalation will stop soon. Global supply chains will be disrupted, businesses will delay investment plans and the cost of capital will increase. Eventually economic growth will slow.

  The labor market remained solid, with payrolls increasing by 213,000 in June, following the strong 244,000 increase in June. Goods producing industries put in another solid month of gains, with 53,000 jobs added. Service jobs added 149,000, following the 188,000 in May. Retail did fall by 21,600. Average hourly earnings increased by 0.19%, slightly weaker than expected. The gain for the year was unchanged at 2.7%. The labor force expanded strongly, pushing the participation rate to 62.9%. The unemployment rate increased to 4.0% from 3.8%. Risks to strong employment growth are increasing. Trade and rising interest rates could slow growth in employment It is likely that we could average 200,000 through the remainder of the year, but that number will decelerate in 2019. Wage growth should crest at 3% by the end of the year.

Important Data Releases This Week

June NFIB will be released on Tuesday, July 10 at 6:00 AM EDT. The survey is expected to come in at 106 in June, down slightly from May’s 107.8, which was the second highest reading in 45 years of data.


June PPI index will be released on Wednesday, July 11 at 8:30 AM EDT. The PPI rose 0.5% in May, fed by a jump in trade services and included hikes for energy and steel and aluminum. We expect the PPI to rise 0.2% in June and the core to also increase 0.2%.


June CPI index will be released on Thursday, July 12 at 8:30 AM EDT. Inflation is showing up in the producer and import price reports, but the pass through has been limited to the consumer. The CPI and the core CPI is projected to rise 0.2% in June, the same increase as in May. On a year-over-year basis, the CPI is projected to have increased 2.9% and the core 2.2%.


June import prices will be released on Friday, July 13 at 8:30 AM EDT. Cross border price pressures have been heated, rising 0.6% in May. Oil-related pressures have been noted, as well as steel and aluminum. We look for a 0.2% rise in import prices for June.

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