Happy 4th of July Weekend Everyone,
I hope you’re all having fun and staying safe. Nothing but a steady wave of economics for this guy, but let me know if you’ve got any questions on the report, or in general.
Here is this week’s Market Wrap:
A hot topic, as always, oil. Thanks to the unrelenting pumping from the United States throughout the winter (highly irregular), oil prices posted worst first-half performance
since 1998 and despite settling higher for the seventh session in a row on Friday, oil prices have suffered greatly as it has posted it worst first half-yearly performance since 1998, falling 14% as traders continued to sell as they express concern about oversupply in the market, despite Opec and its allies’ efforts to tackle the supply and demand im- balance in the industry.
The rally in oil prices in the latter part of June culminated with an unexpected dip in the number of active U.S. drilling rigs after Baker Hughes reported that its U.S. rig count fell by 2 to a total of 756, ending a trend that has seen the number of U.S. rigs increase for six-straight months.
Before the recent rally crude prices had dipped into bear market territory, on the back of data showing that Nigeria and Libya, countries exempt from the Opec production cuts, are set to ramp up crude production, adding to the glut in supply.
Next, the Nasdaq posted its best first half-yearly performance since 2009 despite end- ing Friday’s session in negative territory. The Nasdaq has outperformed both the S&P 500 & the Dow Jones Industrials year-to-date, surging 14% and posting its largest first- half gains since 2009.
The tech-heavy index has had to contend with a recent slump in technology stocks, which fell more than 2% over the past month but failed to dent overall optimism, as the tech sector has added about 15% in 2017.
Last, but surely not least, gold suffered its first monthly loss for the year. After that rate hike a lot of investors expectations that central banks would begin to tighten monetary policy pushed global bond yields higher, effectively decreasing demand for non-interest bearing gold, resulting in the precious metal’s first monthly loss for the year.
Gold’s losses, however, were limited, by a slump in the dollar, as the greenback fell to a fourth-straight month of losses despite Fed chair Janet Yellen on Wednesday, reiterating the need to raise rates “very gradually”. To be clear, an aggressive monetary policy coupled with a strong dollar does not help our (the US) economy. Sure, we can travel to other countries with more to spend, but outside of that the losses far outweigh the gains.
Okay, let’s begin with the three Economic Stooges. Trump, Pence, and Wilbur Ross have all voted enter into a trade war imposing tariffs of up to 20%on a whole host of
products from Japan, Germany, Canada, Mexico, the UK, and China. The vote was 22- 3, but since one of those votes is Trump’s... You see where this is going? First the re- moval from the Paris Climate Accord, which was an incredible economic stimulus for us and now this nonsense. Let me be clear: A protectionist trade policy is detrimental to a nation’s economy. Trump is and has been out of his depth, but should this policy be implemented, America’s economic dominance will come to an abrupt halt.
Global financial markets will focus on minutes of the Federal Reserve’s latest policy meeting in the week ahead, as investors look for more hints on the timing of the next U.S. rate hike and clues on how the central bank plans to pare back its balance sheet. Market players will also keep an eye on key U.S. economic data, with Friday's monthly Jobs Report in the spotlight.
Meanwhile, comments from Bank of England Governor Mark Carney will be in focus, following his unexpected shift in rhetoric towards higher interest rates last week. I see this to be an attempt to gain leverage in negotiations with the EU relative to trade con- ditions. We shall see if this tactic works.
Elsewhere, traders will be looking to employment data from Canada amid fresh speculation the Bank of Canada could raise interest rates as soon as this month.
A monetary policy announcement from the Reserve Bank of Australia will also be in focus.
1. Federal Reserve FOMC Meeting Minutes
The Federal Reserve will release the MoM of its most recent policy meeting on Wednesday at 2:00PM ET.
The Fed raised interest rates as widely expected following its meeting on June 14 and maintained plans to go ahead with another rate hike by year-end. The central bank also provided greater detail about how it plans to reduce its massive $4.5 trillion balance sheet.
Despite the Fed's relatively hawkish message, market players remained doubtful over the central bank's ability to raise rates as much as it would like in the coming months due to softening inflation. They will not raise again this year.
Futures traders are pricing in about a 20% chance of a hike at the Fed's September meeting, and odds of a December increase was seen at around 50%.
The Fed has never raised rates with projections under 75%.
2. U.S. Non-farm Payrolls Report
The U.S. Labor Department will release its June confirm payrolls report (Jobs Report) at 8:30AM ET on Friday.
The forecast is that the data will show jobs growth of 180,000 this month, following an increase of 138,000 in May. The unemployment rate is forecast to hold steady at 4.3% while average hourly earnings are expected to rise .4% after gaining 0.2% a month ear- lier.
Besides the monthly jobs report, this week's holiday-shortened calendar also features U.S. data on manufacturing and service-sector growth, auto sales, factory orders as well as monthly trade figures. Keep a close eye on the trade figures going forward.
Markets in the U.S. will remain closed on Tuesday for Independence Day.
3. BOE Governor Carney Speaks
Bank of England Governor Mark Carney is due to speak at the Financial Stability Board, in Frankfurt, Germany at 8:00AM ET Monday. Carney is due to speak again at the G20 Meetings in Hamburg, Germany on Friday - Wilbur Ross has canceled his trip.
His comments will be monitored closely for any new insight on policy and the timing of when the BOE will next raise interest rates.
There has been a significant shift in rhetoric toward higher interest rates from BOE pol- icymakers during the past two weeks, with a hike by December now 70% priced in. That is fairly conclusive as to where the UK monetary policy is heading, however, it’s always prudent to be pragmatic.
Besides the BOE, traders will focus their attention on reports regarding activity in the manufacturing, construction and services sector for further indications on the continued effect that the Brexit decision is having on the economy.
4. Canadian Employment Data
Canada is to release June employment figures at 8:30AM ET Friday.
The data is expected to show that the economy gained only 15,000 last month, follow- ing an increase of 54,500 in May, while the unemployment rate is forecast to remain unchanged at 6.6% In addition to the jobs report, Canada is to publish monthly trade figures, new building permits and a closely-watched manufacturing survey.
Expectations of a rate hike at the Bank of Canada's July 12 meeting mounted after Governor Stephen Poloz reiterated last week that his 2015 cuts appeared to have done their job and they follow the Federal Reserve any chance they can get.
5. Reserve Bank of Australia Policy Meeting
The RBA's latest interest rate decision is due on Tuesday at 0430GMT.
Most economists expect the central bank to keep rates unchanged at the current record- low of 1.5% for the tenth straight meeting and maintain its neutral policy stance, as it balances the risk of rising household debt against subdued inflation and wages growth. The same issue occurred back in 2009, so be cautious in FOREX down under.
Besides the RBA, data on retail sales and the trade balance should also capture some attention.
The following has been requested by the Washington Post for publication and should be seen sometime next week, or the subsequent week.
Is China’s Belt and Road Soft-Power Becoming a Robust Economic Power Instead?
-Bruno S. Sergi, Ph.D. - Harvard University & University of Messina
Adam Christopher Wood - Harvard University
The U.S. exit from the Paris Climate Agreement cemented the end of Pax Americana. The subsequent reaction from the international community teetered between disappointment and outrage. However, even before Donald Trump assumed the office of President of the United States, Chinese President Xi Jinping's directive at the World Economic Forum in January this year in Davos, Switzerland, was clear: China was ready to lead the international system if the U.S. would not.
This pronounced message denoted that Beijing was not only in a position to overtake the United States in both hard and soft power but willing to accept the responsibility should America’s leadership continue on a tenuous path of diplomacy. What’s peculiar here is that Washington, D.C. should be more concerned about losing their absolute advantage relative to global influence. And while some members of that very same bureaucracy feel that the current issues surrounding the Trump Adminis- tration are simply transitory in nature, the data is beginning to outstrip the exemplarity rhetoric.
The proliferation of China’s Belt and Road project has now seen sixty countries express interest in collaborating with President Jinping on the initiative and for good reason. President Jinping’s initia- tive is seemingly more concerned with capital investment than his Twitter feed, has entered into strategic economic cooperation with the formidable surrounding nations of India, Pakistan, Russia just to name a few. The bilateral agreements reach into the core of western Europe. Through these com- prehensive agreements in finance and trade, China has the potential to achieve the coveted position of the world's number one economic power simply by executing a robust, yet sound policy - soft, not hard power.
While the United States is growing impatient for the Trump Administration to produce the highly touted infrastructure plan he presumptuously ranted about for nearly eighteen months, the Interconti- nental Belt and Road project has accumulated tens of billions of dollars in funding via the Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB), while witnessing a myriad of support see- ing over 200 private companies in energy, utilities, and high-speed-rail.
To date, the Silk Road Fund, in conjunction with the AIIB, has committed $40 billion in finance. This staggering amount of cash inflows is dedicated solely for the use of infrastructure projects
and serves as a multilateral intergovernmental institution focused on supporting its economic inter- linkages while promoting transparency, openness, and sustainability, all while stimulating economic growth. And this is where it gets interesting - we’ve yet to identify the money multiplier. Additionally, all of this economic power will undoubtedly yield political power. Accruing first will be hard power, but that’s not what’s concerning. Soft power, a rare commodity for which the United States has had an absolute advantage since 1918 is what matters.
The framework of the Silk Road Fund follows a sound policy, which could yield a positive-sum game for the public good through financing support via economic trade cooperation and connectivity. The Silk Road Fund aims to establish new infrastructure projects, develop clean and green energy devel- opment, utilize finite resources while simultaneously coupled with a forward-looking agenda.
Statistically, soft-power yields tremendous cooperation and unity throughout the international com- munity and is quantified annually through the Institute of Government (Monocle), Elcano’s Global Presence Report, and Portland’s The Soft Power 30. And while traditional hard-power gauge’s a coun- try’s influence on their military assets, GDP, and overall population, the inherent nature for which soft-power operates is much more comprehensive as it encourages joint action across nations, seeks to quantify social inclusion, human rights, and perhaps the generator of all that this globe depends on - economic growth.
Donald Trump promised a $1 trillion dollar infrastructure plan dedicated to repairing and replacing the nation's weathered bridges, roads, and dilapidated buildings. The stock market rallied - hard. Wall Street bought the snake oil that would have provided these benefits of a noteworthy money multiplier of $4 to $5 trillion, but for only one country - the U.S. China's Belt and Road initiative is not only economically inclusive, but it's also culturally cognizant. When it comes to economics and foreign policy, Trump isn’t even close to playing the correct game.
Make no mistake; traditional hard-power is still incredibly popular. For some nation’s, this one in- cluded, hard-power has provided the very foundation for which we bear the freedom to write, re- search, and breathe. The corrosive tweets stoking the fires throughout the American landscape is slowly draining the soft-power capital which has accrued over the past century. Enter the future of soft-power Economics between the United States and China. Where the prospective for positive and transparent public policy, media, and, most importantly, the consideration for people of all nations to have an equal opportunity to embark on a more inclusive and convergent economic trend becomes a reality.