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Inching Forward Amid Trade Uncertainty

| September 17, 2018

Stocks finished the week with gains, as shifting signals on potential protectionist trade policies between the U.S. and China seemed to drive investor sentiment. Large-cap stocks outpaced small-caps, with companies in the transportation segment—which is part of the industrials and business services sector and includes railroad operators, trucking companies, and airlines—notably outperforming the broad market. Oil prices were volatile, with U.S. benchmark crude oil rising above the $70-per-barrel mark midweek before falling back somewhat.

Trade uncertainty continued to suppress market sentiment. Early in the week, worries about the Trump administration implementing its next round of planned tariffs—a 25% levy on $200 billion of Chinese imports—dampened sentiment. However, on Wednesday, reports that Treasury Secretary Steven Mnuchin would lead a new round of trade negotiations with China helped lift stocks off their intraday lows amid hopes that the talks would head off implantation of the tariffs. The invitation from the administration to the Chinese government to discuss trade policy boosted stocks on Thursday, despite a tweet from President Trump denying that the U.S. is under pressure to reach a trade deal with China.

On Wednesday, technology bellwether Apple introduced a new line of larger iPhones and a revamped Apple Watch, with new functionality focused on monitoring the wearer’s health. Investors cheered the relatively modest changes to the company’s device lineup, bidding Apple shares up following the introductory event as well as for the week. Apple probably also benefited from an upturn in the broad technology sector, which outperformed the market for the week.

The week brought good news on the inflation front. August consumer price index data showed prices rising 2.7% from a year earlier, making it the first month in 2018 that year-over-year inflation has eased. Producer price index data for August also showed more subdued inflationary pressure than earlier in the year. Dovish statements from regional Federal Reserve Bank Presidents James Bullard and Raphael Bostic, as well as former Fed Chair Janet Yellen, also supported hopes that the Fed may pause its rate hikes. The Fed’s next monetary policy meeting is scheduled next week on September 25–26.

The Bank of England and the European Central Bank (ECB) kept short-term interest rates unchanged. However, analysts noted that ECB President Mario Draghi’s post-meeting remarks were slightly more hawkish and vigilant than they have been in the past. While Draghi maintained that risks were still “broadly balanced,” he noted that that “rising protectionism, vulnerabilities in emerging markets, and financial market volatility have gained more prominence recently.”  

Draghi’s acceptance of a 1.7% inflation rate, and confirmation that the ECB’s inflation forecasts are based on higher core inflation and increased nominal wages, suggests that the bank is committed to its stated path. This includes keeping rates at historic lows at least through the summer of 2019 and for as long as needed to ensure that the rate of inflation is close to or below 2% over the medium term. The ECB said it plans to end its asset purchases in December but that reinvestments will last as long as necessary. It also confirmed that it will reduce the amount of bonds it buys by half—to €15 billion from €30 billion—under its quantitative easing program from October through the end of 2018. 

Information from T Rowe Price was used in generating this report.