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The Global Markets Weekly – 9/4/18
Eye on U.S. Divergence as Summer Winds Down
Key data and events this week include the U.S. jobs report, China PMIs, and headline risks on the trade front, positive and negative. As of print Friday, Canada and the U.S. had not secured a deal on short notice, after the U.S. and Mexico had reached a tentative preliminary agreement earlier in the week. As the U.S. administration squeezes its neighbor to the north to join a Nafta-like deal, President Trump also indicated the next tranche of tariffs on $200B worth of Chinese products could begin to be implemented as soon as next week.
Surely fueling the administration’s confidence in keeping the hammer down is a U.S. equity market that has so far continued to test fresh highs, all as Europe and key emerging markets remain soggy at best and well into bear markets at worst. From December 1990 through year-end 2010, the near-term fortunes of U.S. and European equity markets often diverged, but remained in level terms remained within a rough a 15-20% range. Since year-end 2010, the U.S. market has outperformed by a massive 66%. Emerging markets as a whole have diverged just as significantly over the last eight years, underperforming U.S. shares by roughly 60%.
Market divergence needn’t resolve negatively over the near term, and policy divergence may persist a while longer given DE expectations. Tailwinds in the U.S. remain severe over the second half of 2018 and well into 2019. That could further fuel the Administration’s war of attrition on trade, and also reinforce the Fed’s envisioned tightening path. A path above the two-to-three total remaining rate hikes markets are pricing in through 2019 would keep upward pressure on the dollar and rates, and downward pressure on financial conditions in emerging markets. There are few “easy outs” for currently beleaguered EM assets given those trends, which makes Chinese data and its response to tariffs all the more important to watch this week.
Looking ahead, the late-September FOMC meeting will provide some hints but no clear signals about how much room the Fed has to maneuver rates higher. There will be plenty to monitor in coming months beneath strong consumer sentiment figures and a housing slowdown (see our main U.S. section), along with the other risks outlined above if global risk sentiment remains soggy.
Coming Week’s Key Indicators and Events
| Release | DE / Consensus | Comment | |
| U.S. | Aug ISM Man (Tu)
Aug ISM NM (Th)
Aug Payrolls (Fr) Unemployment Avg.Hrly.Earn |
-0.1 to 58.0 /-0.5
+1.3 to 57.0 /+1.1
215K/ 187K 3.8% / 3.8% 0.3% / 0.2% m/m |
Clear rise in manufacturers mentioning tariff risks, non-manufacturing sentiment slipped markedly in July.
July wasn’t as weak as it seemed, still waiting for firmer wage growth, but not necessary for continued Fed hikes. |
| Euro | Q2 GDP Revis. (Fr) | 0.4% / 0.4% q/q | Unrevised from initial estimate, represents current slowdown from 2.8% y/y posted in Q4 2017 (Q2 2.2% y/y) |
| China | Cxn Man PMI (Mo)
Cxn Svc PMI (Mo) |
+0.3 to 51.1/-0.1
+0.3 to 53.1/-0.2 |
Last week’s PMIs upbeat, looking to China for stability amid EM turmoil. |
| Canada | Overnight Rate (We) | Hold / Hold at 1.50% | Another rate hike or two likely over coming year, relevant are ongoing trade discussions with the U.S.. |
| Austral | RBA Decision (Tu) | Hold / Hold | On hold at 1.5% since late 2016, PMI data softening as GDP still solid. |
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