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July
13
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Week In Review

Trade

The White House announced that 10% tariffs on an additional $200 billion of Chinese imports would go into effect on August 30. This is in addition to the tariffs on $50 billion of imports that is already in effect or due to be implemented in the coming weeks. President Xi immediately responded that China would retaliate in kind. Later, Chinese government officials softened their rhetoric while still vowing to respond proportionately to any U.S. actions.

Our Take

The further escalation of the U.S.-China trade conflict increases the risks to global economic growth. Neither side appears to be looking for a resolution to the conflict. While the Chinese may be running out of U.S. imports on which to impose tariffs, the Chinese government has many other options available to retaliate against increased U.S. tariffs. These could include encouraging consumer boycotts of U.S. imports and firms, regulatory burdens on U.S. firms operating in China, seizure of the China-based assets of U.S. firms, and the use of the PBOC’s large Treasury holdings to disrupt U.S. capital markets.


Inflation

U.S. producer prices rose 3.4% year-over-year in June and consumer prices rose 2.9%. These price gains reflect some impact from the steel and aluminum tariffs, but not the effects of the tariffs on Chinese imports.

Our Take

Inflation data continues to firm, and the June data is unlikely to deter the Fed from its policy tightening course.


Brexit

Following a meeting where May appeared to have united Conservatives around her proposed Brexit plan, Foreign Secretary Boris Johnson and Brexit Secretary David Davis resigned over opposition to May’s plan. May replaced these two with Brexit supporters, but she also began reaching out to the opposition to try to get support in Parliament for her plan.

Our Take

Time is running out for the British government to unite around a Brexit plan and begin serious negotiations with the EU on the post-Brexit relationship. It appears increasingly likely that there is no Brexit plan that would pass through Parliament right now. This increases the likelihood of a no-deal Brexit, which would be an extremely disruptive shock to the British and the EU economies.


Municipals

Chicago Board of Education general obligation debt received an upgrade from Moody’s Investor Service this week. Moody’s raised the rating from B3 to B2, affecting $4.8 billion of debt. The agency cited a revised state funding formula, along with state pension help and “enhanced authority to levy property taxes” as reasons for the upgrade. Moody’s also affirmed Chicago’s general obligation debt rating at Ba1, but revised the outlook from negative to stable.

Our Take

The school district continues to struggle with debt and underfunded pensions. Chicago is also dealing with pension liabilities and has been following a five year plan to increase pension contributions. While the Chicago Board of Education upgrade and the Chicago revised outlook are positive events, both issuers remain in junk territory.