It was a big week for US equities. The Nasdaq hit record highs on Friday and the SP500 reached five-month highs even though financial stocks were weak due to poorly received earnings from some major banks. The financials were offset by a stronger energy sector as oil prices continued to recover from an earlier sell off.
The rise in US equities may be justified as the market forms the belief that the US has less to lose from the implementation of more tariffs than many other countries. Even so, US multinationals could be hit hard if it becomes tougher for them to operate in international markets. This could also take the shine off US tech companies, which have been leading the charge in the equity market.
US inflation hits six-year high
Staying in the US, inflation struck a six-year high as the US Consumer Price Index (CPI) rose by 2.9 per cent in June. The market hardly reacted to the increase as it was widely expected. Despite the pick-up in CPI, we still think that there is scope for the US Federal Reserve (the Fed) to raise rates this year as price pressure in the US economy builds.
For the Fed, It’s a tricky time right now. It can tighten policy more aggressively to stem short-term inflationary risks or to keep policy looser to offset the negative impact on growth from protectionism. Currently, the effect of tariffs is not likely to be large enough to cause the Fed any headaches, but there is clearly a reasonable chance of further escalation.
China considers trade retaliation
Moving to China, it’s unclear how the Asian superpower will respond to the US announcement of plans to impose taxes on a further $US200 billion worth of Chinese imports. It could implement further tariffs on imported US goods, but it would not be able to fully match the scope of the US tariffs.
China can also respond by other means, including deliberately weakening the renminbi. However, it is unlikely the People’s Bank of China (PBOC) will tolerate, or engineer, a steep fall in the currency.
It could also directly target US firms operating in China. There is considerable scope for China to retaliate by penalising these firms given the sales of US majority owned affiliates in China exceeds $350 billion revenue. Measures could include much more stringent regulatory checks or consumer boycotts.
Still in China, trade data released Friday showed exports topped expectations by rising 11.3 percent in June while import growth surprised to the downside. The slowdown in credit growth to a multi-year low in June may point to a further weakening in domestic demand. If this is the case, I think it’s likely the PBOC will act aggressively to prevent the economy from slowing too rapidly.
Australian housing finance remains buoyant
In Australia, housing finance commitments rose for the second straight month in May. While annual growth rate remains negative, the figures suggest that house prices will not slip much further for now.
Falling house prices don’t appear to have dampened the mood of households, with the July Westpac Consumer Sentiment Index at its strongest level since 2013 -- we’re a crazy bunch us Australians.
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