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June
15
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Week In Review

Trade

The U.S. Trade Representative’s office (USTR’s) released a list of 818 products representing $34 billion in imports from China that will face 25% tariffs to be implemented on July 6. The USTR’s office also identified an additional 284 products representing $16 billion in imports that will face 25% tariffs following a public comment period. The products identified are meant to challenge the “Made in China 2025” initiative and are being implemented under Section 301 as retaliation for China’s intellectual property practices. The Chinese government announced that it would impose retaliatory tariffs on U.S. exports in response, and President Trump has stated that his administration will impose additional tariffs if China does this.

Our Take

Today’s announcement of the product lines targeted and the announcement of a near-term date for implementation is an escalation of the ongoing trade conflict. Previous developments in the Section 301 dispute did not involve actual implementation of trade barriers and could be considered posturing for negotiations. Today’s announcement leaves less room for that interpretation.


U.S. Economy

Retail sales rose by 0.8% month-over-month in May, double the expected gain. Consumer inflation in May was up 2.8%, matching expectations.

Our Take

Both of these reports indicate that the U.S. economy is continuing to grow, even in the face of mounting risks. This data is unlikely to cause the Fed to alter its course from the gradual tightening and balance sheet reduction currently underway.


Fed

On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced its decision to increase the federal funds rate to a target range of 1.75% to 2% and indicated two more rate hikes are likely this year. According to the Fed statement, the labor market continued to strengthen and economic activity has been “rising at a solid rate.” The committee noted that growth of household spending has picked up and business investment “continued to grow strongly,” while inflation moved closer to its 2% target. The Fed raised its outlook on economic growth to 2.8% and lowered its expectation for the unemployment rate to 3.6%.

Our Take

The minutes reflect a more hawkish consensus within the Fed. Unemployment is low, growth is accelerating, and inflation is nearing its target. These factors contributed to the Fed’s more optimistic view on economic growth and higher inflation expectations. In response, the committee now expects a total of four rate hikes in 2018 and another three in 2019.


ECB

Draghi confirmed that the ECB will wind down its quantitative easing program this year. Forward rate guidance was mildly dovish.

Our Take

The ECB is looking past any economic slowing and concerns about Italy to begin monetary policy normalization. This leaves the BOJ as the only one of the big three central banks still adding stimulus.


Municipals

Tim Draper, a Silicon Valley venture capitalist, is reported to have received enough signatures to place his proposal to break California into three separate states on the November ballot, dubbed “Cal 3.” Northern California would include San Francisco, Sacramento, and areas to the north. Southern California would include San Diego, Fresno, Bakersfield, and inland areas to the south. California would include the coastal area from Los Angeles to Monterey. If the measure is passed by California voters, it would then move to Washington DC for Congressional approval.

Our Take

Many believe the proposal is a longshot. Breaking apart the nation’s most populous state would be a lengthy and expensive process. Even if the Cal 3 measure passes in November, it is unlikely that Congress would approve it. The last time a state was divided was in 1863, when West Virginia was created.