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Aug 01 2018

8/1/18 Market Notes

July ended on a positive note as all major stock averages ended the day and the month higher. The
S&P 500 gained ½% on Tuesday, ending the month over 4% higher as late month trade jitters and
mixed earnings reports increased downside volatility in the past week and a half. Oil prices declined
7.8% in July, as added supply and demand concerns drove prices lower. Treasury yields and the U.S.
dollar, while exhibiting greater than normal volatility essentially ended where they began.

On the economic front, data has mostly been in line with expectations, as major consumer inflation
gauges remain benign during this robust growth environment. Recent data has pointed to an uptick in
inflation, with the Employment Cost Index rising 2.8% year-over-year, the greatest increase in a
decade. The cloud hanging over the market is the threat of a trade war between the United States and
its trade counterparties. Tuesday and this morning’s market action are a typical illustration of the
uncertainty and whimsical nature to trade in the current environment. After spending most of the day
near the flat line, stocks rose sharply in the mid-afternoon as reports surfaced that Shino-America
trade talks had resumed. Industrial shares such as Caterpillar (CAT) and 3M (MMM) rose sharply,
propelling the tariff sensitive sector 2.12% higher for the day. This morning, however, those gains are
seen as reversing as major equity index futures are pointing to a lower open after the White House
indicated that the Trump Administration is contemplating adding a 25% tariff on over $200 billion
worth of Chinese goods.

International and U.S. bond yields fell yesterday after The Bank of Japan surprised market
participants in announcing it is not planning to materially change its monetary policy measures,
instead opting for continued negative rates. The move underscores the continued divergence in
economic performance and accompanying interest rate policy. Most expect the U.S. Federal Reserve
to raise interest rates twice more this year, and possibly as much as three times in 2019, likely putting
out benchmark rate near 3 ½% by the turn of the decade. By comparison, Japanese and European
yields are virtually certain to remain below 1%, most likely leading to a continued weaker than
‘normal’ Euro and Yen, thereby offsetting a significant portion of the impact of trade tariffs.


The GGFS Investment Committee