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July
6
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Week In Review

Trade

The Trump administration implemented 25% tariffs on $34 billion of imports from China at 12:01 am on Friday. Similar tariffs on an additional $16 billion of imports are due to be implemented in two weeks. These tariffs are specific to China only and are in response to Chinese intellectual property practices. China immediately implemented retaliatory tariffs on imports from the U.S., mostly on agricultural goods and autos. The implementation of these tariffs was signaled well in advance, and there was a limited immediate market reaction.

Our Take

This is the first trade restriction implemented that is specifically targeted at China. The implementation of these tariffs moves the situation from a threatened to an actual bilateral trade conflict with China. This trade conflict and its threatened escalation have the potential to severely distort economic activity and is a major threat to global economic growth. Hopefully the two sides will find a way to deescalate the fight and move toward freer flows of goods, services and capital. However, events have been steadily marching toward these tariffs, and neither side seems to be looking for an exit from this conflict.


Employment

The U.S. economy created 213,000 jobs in June, exceeding expectations. The unemployment rate rose from 3.8% to 4.0%, as the labor force participation rate increased from 62.7% to 62.9%. Average hourly earnings rose 0.2%, less than anticipated. Year-over-year, wages have risen 2.7%.

Our Take

Job creation remains strong, but the main question the market seems to be asking is when the tight labor market will lead to wage inflation. Thus far, this has not occurred, as wage gains have remained subdued. That said, little in the employment report is likely to change the Fed’s current course of “gradual” tightening.


FOMC Minutes

The Federal Reserve Open Market Committee (FOMC) released the minutes from its June meeting. The minutes show consensus among the members that the economy is performing well, with solid labor gains and increased business investment. The overall outlook is for the economy to expand at “an above-trend pace.” One exception from the optimism is the potential risk to the economy associated with current trade policies. On balance, the committee judged that a gradual approach to rate increases remains appropriate. At its current pace of increases, officials noted that the benchmark federal funds rate could be at or above its “neutral” level “sometime next year.”

Our Take

It appears the Fed’s confidence in the economy continues to grow despite the increase in some potential risks. Unemployment is low, growth is accelerating, and inflation is nearing its 2% target, yet nothing in the statement hinted that Fed officials plan to deviate from the stated gradual path of rate increases.


Municipals

Massachusetts and South Carolina are the only two states without a signed budget in place for fiscal year 2019, according to the National Association of State Budget Officers. South Carolina’s lawmakers have approved a budget that Governor Henry McMaster is in the process of reviewing and is expected to sign. Massachusetts lawmakers continue to negotiate budget details after agreeing on a temporary budget in order to keep the government open.

Our Take

Massachusetts lawmakers produced a late budget both last summer and the summer before. Lawmakers are expected to return on Monday and get back to work on a budget compromise. Republican Governor Charlie Baker and the Democrats who control the House and Senate must work together to finalize the budget. Lawmakers have expressed optimism that a budget will be in place by July 31.