President Trump Orders Trade Representative to Identify $200 Billion Worth of Additional Goods for Tariffs… After implementing 25% tariffs on $34 billion worth of goods we buy from China last week, the president is upping the ante by considering levying a 10% tariff on $200 billion worth of additional products.
What it means – First a brawl, then a skirmish, now we’re moving toward a war. The Chinese claimed they were shocked – shocked! – at the notion of additional tariffs. The Middle Kingdom responded in kind to the first round, but they don’t buy enough goods from us to match Trump on the second round. So instead they’re doing what we wrote about two weeks ago, slowing inspections at the border, slow-walking paperwork, and generally making it harder to get items to market.
Prices for soft commodities and metals both fell on the news as investors settled in for a longer fight than expected. If Trump keeps up the pressure, then global trade will slow down, causing economies around the world to suffer. The Dow Jones Industrials Average just made it back to positive for the year. If the trade war continues, expect the market to fall in the third quarter.
Mortgage Refinancing Falls to Lowest Level Since 2000… The 30-year mortgage rate eased 3 basis points last week to 4.76%, but that’s still far above the average of 4% last year. Higher rates curb refinancing.
What it means – Mortgage applications for home purchases last week were 8% higher than the same week a year ago, marking a sharp rebound from the prior week. Mortgage applications closely track purchases, so it’s no surprise that overall applications are near the flat line for the year.
Refinancing had been a steady source of income for banks and mortgage lenders for much of the last decade, but that run of revenue might be nearing an end. Even though long-term interest rates aren’t moving up, lenders are pushing up mortgage rates in anticipation of higher rates. Homeowners that would refinance at 4.75% did so years ago. Now it takes rates below 4% to draw in new business.
Without refinancing, mortgage lending operations will struggle to grow in the months ahead.
Producer Price Index (PPI) Up 0.3% in June, Up 3.4% Over Last Year… The measure of prices at the wholesale level came in higher than expected, with energy prices up 0.8% and trade prices on the rise.
What it means – Food prices held down overall PPI last month as the trade wars depressed crop prices. Without that artificial force, PPI would have jumped even more. Higher energy prices are evident because of higher oil prices, but the bump in trade prices goes deeper. Not only are wholesalers paying more in fuel charges to transport goods, they are also paying higher wages to drivers. This issue is bigger than many people think.
Consumer Prices Up 2.9% Over Last Year, Up 2.3% Excluding Food and Energy… The higher numbers didn’t surprise the markets, but they show that inflation is creeping into the economy.
What it means – “Core inflation” means the change in prices on everything but food and energy. If we toss out housing as well, instead of calling it “core inflation” we could call it “inflation on what we don’t need.” Yes, food and energy are volatile, but they are also essential to daily life, so excluding them from inflation makes little sense.
With both headline and core inflation solidly over 2%, we can expect the Fed to remain on track with raising interest rates four times this year. That will put pressure on the yield curve because short term rates will move perilously close to long term rates. A flat yield curve is one thing, an inverted curve, with short rates higher than long rates, is another. If short rates move up and economic growth slows, we’ll be set up for the dreaded stagflation.
President Trump Nominates Judge Brett Kavanaugh to Succeed Justice Anthony Kennedy on the Supreme Court… The D.C. appeals court judge has been consistently conservative from the bench.
What it means – Business leaders and conservative political activists cheered Judge Kavanaugh’s nomination, as they believe he will be the deciding vote that will tilt the court to the right for years to come. At the top of the business list of potentially different outcomes is a challenge to the Chevron deference theory. In a case decades, ago involving the oil giant, the Supreme Court decided that when laws are vague, the courts should defer to the judgment of government agencies when interpreting regulations. This set the stage for administrators to effectively set laws. Business leaders believe overturning the Chevron deference will scale back the regulatory environment.
Civil Journalism is Here… A new entity called Civil will soon launch, connecting readers to news organizations in a unique way. Through their new token, the CVL, subscribers can keep news organizations in line.
By pledging tokens, readers can challenge the veracity of a story. Others can join in on either side (true or false). A third-party arbiter determines who is correct. The winning side collects the tokens from the losers. Of course, there is still an issue. Who decides when the arbiter got it wrong? But at least there are some organizations trying to move away from the advertising-supported news model. Whether or not that leads to better reporting remains to be seen.
Data supplied by Dent Research/Delray Beach Publishing
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