Trade Tensions Rise – May 2019 Edition

The economic data took a back seat to the news on trade this week. Investors hoping for signs of progress in the negotiations between the U.S. and China were disappointed each day. On top of this, investors were blindsided Friday when the Trump administration shifted its focus and threatened to impose a 5% tariff on all imports from Mexico beginning June 10. Since tariffs and other barriers to trade slow global economic activity, these events were favorable for mortgage rates and bad for the stock market.

The latest data revealed that inflation remains at low levels. In April, the core PCE price index, the indicator favored by the Fed, was just 1.6% higher than a year ago, down from an annual rate of increase of 2.0% at the end of 2018. The recent tame inflation readings and the uncertainty on the trade front have had a significant impact on the outlook for Fed policy. Most investors now expect that a rate cut will take place before the end of the year.

As expected, first quarter GDP, the broadest measure of economic growth, was revised slightly lower from 3.2% to 3.1%. More notable, though, is that two months into the second quarter the early forecasts for Q2 GDP growth generally are close to just 1.0%. Part of the explanation for the sharp slowdown is that certain volatile components such as inventories were unexpectedly strong during the first three months of the year (a buildup in inventories means less production will be needed in the future). This is not the whole story, however, as it appears that the effects of the trade dispute are taking a more meaningful toll on global economic activity.

Looking ahead, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will be released on Monday and the ISM national services index on Wednesday. The next European Central Bank (ECB) meeting will take place on Thursday. In addition, news about the trade negotiations could influence mortgage rates.