Trade And Tech: Same Issues Still Could Be Center Stage As New Week Begins

The kids are in school and Labor Day is just a memory, putting the markets back into full focus. The week ahead looks jam packed with inflation data, meetings, potential trade developments, and an Apple Inc. AAPL product event, so consider pouring a cup of strong coffee and preparing for the deluge.

Stocks enter the week a bit on the defensive after trade fears and a tech sector wash-out put many names in the red over the last few sessions. Despite recent losses, however, U.S. indices aren’t far off their all-time highs, and interest rates remain in the middle of their recent range between roughly 2.8 and 3 percent for the benchmark U.S. 10-year Treasury note.

Still, trade concerns continue to be front and center, with stocks taking a slide around midday Friday after President Trump said he’s ready to put new tariffs on $200 billion of Chinese goods. Reports in the media that the U.S. and China hadn’t made progress in trade talks added to the cloudiness, as did reports that the U.S. and Canada remain far from an agreement. Volatility kicked up, with the VIX rising above 15 toward the end of the week, up from lows below 13 a week ago. The choppiness could continue in days ahead as geopolitical events might keep setting the tone.

Also, the tech sector looks particularly volatile after losses for the FANG stocks last week. While there was a bit of recovery on Friday, those jitters might not just fade away overnight.

Jobs Report Helps Raise Rate Hike Anticipation

Before looking more closely at the week ahead, let’s return briefly to Friday’s August payrolls report. The data looked pretty good overall, with top-line jobs growth of 201,000 near Wall Street analysts’ expectations and hourly earnings up a tad. 

It was also a fairly broad-based report in terms of where jobs are being created. The economy lost jobs in some sectors, with worries centered on manufacturing, auto and retail. However, combine those three sectors and we’re talking about 14,000 jobs. While you never want to see people lose work, it’s a small number in the great scheme of things, and there were still 201,000 jobs created on a net basis in August.

Where did those jobs come from? Sectors like healthcare, construction, and transportation. Some of those are areas that haven’t necessarily been in the top-three in quite a while, so the report appeared to show the solid economy beginning to pull in some labor demand in sectors that hadn’t been seeing it. 

Still, the stock market reacted Friday as if it didn’t quite know how to react, and that’s understandable. When investors see strong job and pay growth for so many months in a row, the tendency is to worry about possible inflation and the Fed potentially moving to try and block it. Wage growth of 2.9 percent was the best year-over-year number since 2009, which certainly seems to reinforce the idea that a Fed rate hike in September is almost definite, and might make the December probability a little bit higher.

One sign of that sort of investor thinking might have been evident in Treasuries, where 10-year U.S. yields leaped six basis points from Thursday’s low to trade at 2.93 percent by midday Friday. In addition, two-year yields hit their highest level in more than 10 years, rising to above 2.7 percent. The cost of borrowing is still relatively low historically, especially when you look at the long end of the yield curve. However, those car and house payments are starting to cost people more, and could rise again if the Fed does what investors appear to expect and raises rates another couple times before the new year.

The Week Ahead

From a data perspective, the key figures to watch in coming days are probably the August producer price index (PPI) and consumer price index (CPI), due Wednesday and Thursday mornings, respectively. Another key report is retail sales on Friday. The inflation data might get a closer look than usual, coming after such strong wage growth in August. The question is whether manufacturers and business owners are starting to pass along wage increases to customers in the form of higher prices. The PPI was flat in July on a monthly basis but up 3.3 percent year-over-year. The CPI rose 2.9 percent in July from a year earlier and 2.4 percent on a core basis that strips out food and energy. We’ll look more closely at analyst estimates for August as the week continues.

Another event to consider watching is AAPL’s product launch at 1 p.m. ET Wednesday. Though it’s unclear exactly what AAPL might announce, its September events in the past have often featured iPhone news. There’s speculation in the media about AAPL potentially announcing new high-end iPhones, and that could be playing into the stock’s recent rally. Recall that in its latest quarter, AAPL reported an average iPhone selling price of  $724, well above Wall Street’s expectations.

Also consider keeping an eye out next week for the European Central Bank (ECB) meeting (see more below). The Fed’s monthly Beige Book is due as well.

FIGURE 1: Fed’s Next Move Eyed: After sinking slightly in late August amid concerns about possible trade battles and weakness abroad, the 10-year yield and the dollar index (purple line) both got a boost late last week. The strength on Friday came after the August payrolls report showed wages rising 2.9 percent year-over-year, which appeared to point toward rising chances of two more Fed rate hikes this year. Data Sources: CME Group, ICE. Chart Source: The thinkorswim^® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Shutdown Shot Down?

Nothing is official, but there were media reports late last week that a government shutdown might not be in the immediate future. Congress has until the end of this month to get its books in order, and there had been some speculation that the date would come and go without an agreement. However, it now looks like any battle between Congress and the White House over proposed border security spending might get pushed back until after the November election. Nothing is in stone, of course, and this might still bear watching. However, it’s possible the market might dodge this particular bullet, at least for now. Stay tuned.

Quarterly Check-Up

By now you probably don’t need any reminding that we’re in September. Still, it might bear repeating that September marks the end of the Q3 and the fiscal year of some companies. Many people use this time to review and potentially re-allocate or rebalance their portfolios. With three quarters down and Q4 guidance provided, investors generally have a better snapshot of a company’s actual and projected growth to help them make more informed decisions. So if you missed your mid-year check-up, maybe consider scheduling an end of Q3 check-up for yourself to make sure you’re allocated and balanced in a way that potentially steers you toward long-term goals. The market is still near all-time highs, so remember to check your balance between fixed income and equities, as the equity portion might now be above where you planned.

ECB Meeting Up Next

Inquiring eyes might turn toward Europe this week as the European Central Bank (ECB) holds its monetary policy meeting in Frankfurt. An announcement and press conference are scheduled for Thursday. The meeting takes place with the benchmark German 10-year bund yield still hanging around 0.4 percent, well below highs above 0.7 percent earlier this year and perhaps a sign that investors continue to worry about sluggish European economic growth and potential trade issues. The recent currency weakness in Turkey probably didn’t help, in part because many European banks have exposure to Turkey’s struggling economy. 

Last time out, back in July, the ECB left interest rates unchanged, with the key lending rate at zero. It also repeated that it plans to keep rates at present levels “at least through the summer of 2019." No changes in monetary policy or forward guidance are expected at the meeting this coming week, Bloomberg reported. Instead, the news agency said, officials are likely to confirm their plan to start slowing bond purchases in October and end the program by the end of the year. European economic growth continues to be on the slow side, rising 0.4 percent in Q2 for the second quarter in a row.

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