Investing.com - Here’s a look at three things that were under the radar this past week.
1. China in Danger of a Double Dip in Growth?
While much of the focus has been on the U.S. economy and the possibility the Federal Reserve will dive in with interest rate cuts to keep growth going, investors shouldn’t ignore the other side of the big trade dispute.
China is in danger of a double dip in slowing growth, Morgan Stanley said this week.
Citing trade tensions Morgan Stanley has already cut its fourth-quarter China GDP forecast by 20 basis points to an annual rate of 6.4% from 6.6%. It also cut its full-year 2019 forecast to 6.4% from 6.5%.
The country posted a surprise first-quarter growth rate of 6.4%, holding steady from the fourth quarter of 2018 and topping forecasts for GDP growth of 6.3%. That followed third-quarter 2018 growth of 6.5% and second-quarter growth of 6.7%.
But with the trade war, there’s the possibility of growth dipping down again.
“The time window for China and the U.S. to address trade tensions is narrowing,” Morgan Stanley analysts said in a research note. “If trade talks stall post G20, we see further downside risks to growth.”
“If the US imposes 25% tariffs on the remaining (approximately) US$300 billion of imports from China, China’s GDP growth could decelerate to 6.0% in 2019 despite more aggressive stimulus, with quarterly growth dropping below 6.0% (annually) by 2H19.”
With regard to the new tariffs, President Donald Trump said Thursday he “will make that decision in the next two weeks after the G20.”
“I will be meeting with President Xi (Jinping) and we’ll see what happens, we’re probably planning it sometime after G20,” Trump said.
2. Powell Pivot Not the Only Reason Stocks Will Remain in Vogue
Friday's rally in stocks on a weak U.S. jobs report marked a throwback to the post-crisis era, when signs of economic woes were met with cheers amid expectations the Fed would show up and ease, ease, ease.
But even if the Fed fails to deliver a rate cut, stocks will likely remain hot as the plunge in Treasury yields leaves investors with little choice to go elsewhere, analysts say.
The 10-year Treasury yield slumped to a 21-month low of 2.065% on Friday, falling below the average dividend return of an S&P 500 stock at 2.078%. More than 44% of S&P 500 stocks yield more than 10-year government bonds, according to FactSet.
Keith Lerner, chief market strategist at SunTrust Advisory Services, told MarketWatch that it was "unusual" that the 10-year yield is so close to the S&P 500.
"With yields this low, you don’t even have to be particularly optimistic about the economy” to buy equities, he added.
The spread between the 3-month bill yield and the 10-year note yield stood at about negative 17 basis points, continuing an inversion of the yield curve that resurfaced weeks ago.
"They’ve been driven largely by trade, (and) maybe some other risk-off factors," said Michael Schumacher, managing director and global head of rate strategy at Wells Fargo Securities.
"But it’s really that deviation between the Fed on the very front end and risk-off concerns on the back end. That’s why the curve is inverted in our view, and that’s why we think it’s not really a recession predictor at this point."
3. Monopoly Pricing Doesn’t Equal Inflation
The issue of market competition came to the fore recently with signs that the government may move to curb the dominance of tech powerhouses like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL).
This week the Richmond Fed issued a report on whether markets were less competitive. As with most complex, hot-button issues, a definitive conclusion wasn’t reached, with the Richmond Fed saying the explanations of market concentration and price markups don’t all “point to a commensurate increase in market power.”
But also in the report was a good explanation for rate watchers on how monopolistic companies boosting markups (the ratio between price and cost) wouldn’t necessarily raise inflation concerns at the central bank.
“Inflation is a measure of rising prices generally, but markups measure how much individual firms set prices above their costs,” the Richmond Fed said. “Thus, it is possible for markups to rise because firms facing little competition are able to set prices high or because efficient firms have found ways to reduce their costs while keeping prices stable.”
“It also may be difficult to discern a connection between markups and inflation if the Fed is pursuing monetary policy that offsets inflationary pressure from markups,” it added.
Still a “recent study found that ‘the welfare costs of markups are large,’ primarily because they act as a tax on output,” the Richmond Fed said.