Golden Goose at Home, Cold Turkey Abroad
The U.S. economy remains solid with second quarter GDP growth of 4.1%, the highest level since 2014. Real GDP growth benefited from a surge in exports as trading partners expedited their orders before tariffs from China take effect. The unemployment rate fell to 3.9% in July, and the U-6 unemployment rate (which includes people working part-time for economic reasons and those willing and able to work but have stopped looking) reached its lowest level since 2001 at 7.5%.
Nonfarm payrolls rose by 157k in July (below the average monthly gain of 203k for the past twelve months), and consumers continue to remain optimistic about the current economic conditions. The Federal Open Market Committee’s (FOMC) target range for its benchmark policy rate remains unchanged at 1.75% – 2.00%. On August 1, 2018, the FOMC expressed that household and business fixed investment spending have “grown strongly.” Inflation remains close to the Fed’s target of 2.00%, and the market largely expects two additional rate hikes this year in September and December.
All these positive developments are somewhat clouded by the escalation of the trade war with China. So far, the U.S. imposed a 25% tariff on $50 billion worth of imports from China, and the Trump administration is now considering adding $200 billion more to the list as early as September. China recently threatened retaliation on $60 billion of American imports, potentially bringing the total to $110 billion worth of American goods subject to a 25% tariff.
A full-blown trade war with Europe has been averted, but the US tariffs on steel and aluminum will remain. However, more recent geopolitical relations between the US and Turkey have deteriorated sharply, and the Trump administration plans on doubling its tariffs on Turkish steel and aluminum. Due to multiple factors, Turkey seems to be on the brink of a financial crisis, causing the lira to plummet and analysts to raise concerns of a wider global contagion due to the country’s sizable foreign currency-denominated debt.
Commercial Paper Yields (A-1/P-1)
Current Economic Releases
|GDP QoQ||Q2 ’18||4.10%|
|U.S. Unemployment||Jul ’18||3.90%|
|ISM Manufacturing||Jul ’18||58.10|
|PPI YoY||Jul ’18||4.20%|
|CPI YoY||Jul ’18||2.90%|
|Fed Funds Target||August 2018||1.75% – 2.00%|