The jobs report could not take Trump’s trade war escalation out of the headlines, with the Dow down over 300 points in early trade. However the jobs report did suggest that the tariff crisis is not KO’ing the US economy. That had to soften the negative blow from the President’s decision to slug the remaining $US300 billion worth of Chinese goods un-tariffed with a 10% tax.

Economists tipped July would bring 164,000 jobs and 165,000 showed up. But the big news was the 3.5% increase in wages, which was tipped to be only 0.1%!

What key market-driving players have to work out is whether the pluses from an OK reporting season and this jobs report outweigh the negatives from the trade war escalation and the possibility that the Fed will worry about cutting interest rates with wages on the rise, as this development has to be good for stoking the inflation fire.

To sum up the reaction, CNBC looked at the analysis from Bank of America’s equity strategist Savita Subramanian, who wrote in a note: “Our sensitivity analysis suggests that fresh tariffs (10% on $300b) would represent a hit to S&P500 earnings of 30-40bps from rising input costs.”

He added: “The ‘easy money’ to be made is in longer term investments…inexpensive, domestic quality cyclicals, like financials.”

And I liked this and you should too – he sees “no signs of an imminent recession/bear market.”

That said, this latest Trump trade play has taken the potential steam out of the global economy and our market can’t like it, as we’re a heavily dependent trade economy. The only plus is that we could get more Chinese business, as Beijing stimulates to make up for the Trump tariffs.

To comprehend the impact of this latest tariff threat, oil prices plummeted on Thursday after Donald imposed more tariffs on Chinese goods. Crude prices dropped 7%, as the impact on global growth of his move was factored in.

And this was a week when the trade negotiations were expected to bring better news!

There is one more fear out there and that’s the possibility that the President could raise the 10% to 25%, which would  be really bad for stocks. And another worry for the wall stock players climb is the belief that China might decide to wait it out until the election next year, hoping that the US economy falters because of the trade war and America votes out Donald and a more tractable Democrat takes the Oval Office.

That would be bad for the global economy, stocks and, ironically, America could stick with Donald as he would play up the threat of the Chinese. It doesn’t bear thinking about but it’s a genuine possibility.

It’s been a crazy week, with the US Federal Reserve’s Open Market Committee (FOMC) cutting the target range for the federal funds rate by 25 basis points to between 2% to 2.25%, which was the first cut since December 2008 but the vote to cut was 8 to 2. Boston’s Eric Rosengren and Kansas City’s Esther George both voted to keep rates unchanged.

The market liked the cut and showed it until Fed Chair Jerome Powell’s press conference, where he was more “hawkish” than expected, calling the cut a “mid-cycle adjustment”, adding “it’s not the beginning of a long series of rate cuts.” 

This honest observation disappointed those in the market who loved the idea of a number of cuts. However, the Trump tariff play, despite the good jobs number, has clearly put more cuts back on the table and probably explains why US stocks have not given in too much to gravity overnight, as the Dow only ended down 98 points.

By the way, the Fed also decided to end the reduction of bonds it is holding on its balance sheet. The Fed’s balance sheet will stop being reduced by selling bonds, effective from August 1, with bond assets totalling around US$3.6 trillion. This means it will be taking less money out of the economy as bond sales does exactly that. During the GFC, the Fed bought $US 4.5 trillion under its quantitative easing policy and this recently has been reversed.

On the local front, Donald’s fingerprints were all over Friday’s fall from record highs. After hitting an all-time high on Tuesday, we lost 0.4% for the week, with the S&P/ASX 200 Index finishing at 6768.6. Our euphoria didn’t last long, with Jerome Powell underwhelming the market at his press conference and Donald throwing his new tariff curve ball.

Not helping was a dip in iron ore prices, so BHP lost 5.1% to $38.78, Rio Tinto gave up 3.6% to $94.77 and Fortescue was smashed to lose 7.8% to $7.64. And in case you missed it, UBS reduced its price target from $100.36 to $97.08. (SMH)

What I liked

• Retail trade rose by 0.4% in June after a 0.1% increase in May. Economists had tipped a 0.3% lift in sales.
• The CoreLogic Home Value Index of national home prices rose by 0.04% in July – the biggest increase since October 2017. And capital city home prices rose by 0.1% – the biggest lift since August 2017. Home prices rose most in Darwin (up 0.4%), followed by Hobart (up by 0.3%).
• The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.9% to 118.5 points. Consumer sentiment remains above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
• The Consumer Price Index rose by 0.6% in the June quarter, above expectations. In seasonally adjusted terms, the CPI rose by 0.7%. The annual rate of headline inflation lifted from 1.3% to 1.6%.
• Commercial building approvals stand at 11-month highs.
• The Australian Industry Group (AiGroup) Performance of Manufacturing Index rose from 49.4 points to 51.3 points in July.
• Export prices rose by 3.8% (consensus: 2.8%) in the quarter to be up 17.4% over the year – the strongest annual growth rate in two years.
• Our terms of trade has risen by around 2.8% in the June quarter.
• The Housing Industry Association reported that in seasonally-adjusted terms, new detached house sales rose by 0.8% to 13,801 units in the June quarter – the first quarterly lift since December 2017.
• International scheduled passenger traffic through Australian airports increased to 3.208 million in May 2019 from 3.027 million in May 2018 – an increase of 6%. Passenger traffic for the year ended May 2019 was 42.071 million, up by 4%. The number of travellers from Indonesian airports grew by 10.9% to 3,224,688 people over the year to May.
• The ISM manufacturing index in the US fell from 51.7 to 51.2 in July (forecast 52), where anything over 50 means expansion.
• US consumer confidence rose from 124.3 to an 8-month high of 135.7 in July.
• The S&P/Case Shiller home price measure rose 0.6% as expected in May, to be up 2.4% on the year.
• China’s official manufacturing purchasing managers’ index rose from 49.4 points to 49.7 points in July (consensus: 49.6 points). And the services gauge fell from 54.2 points to 53.7 points in July (consensus: 54 points). A level above 50 denotes expansion in activity.

What I didn’t like

• Private sector credit (effectively outstanding loans) rose by 0.1% in June (consensus: +0.3%). Lending growth for housing is the slowest since records began in 1976. Business credit fell by 0.1% in June – the first contraction since January 2017.
• According to APRA, bank lending to households by credit card fell by a record 5% in the year to June. Credit card lending totalled $39.2 billion in June – near 8½-year lows.
• House prices in July were down in Perth by 0.5%, followed by Adelaide and Canberra (both down by 0.3%). Regional home prices fell by 0.2%.
• Council approvals to build new homes fell by 1.2% in June after rising 0.3% in May. But the value of all building approvals (including commercial) rose 2%.
• The “final demand” component of producer prices (business inflation) rose by 0.4% in the June quarter to stand 2% higher than a year ago but inflation is only 1.8%, which means business costs are rising faster than the price rises they are making.
• The Federal Reserve’s preferred inflation measure – the core personal consumption deflator – rose 0.2% in June to stand 1.6% on the year, which is too slow.

The gamble ahead

Morgan Stanley analysts think earnings season could hurt the stock market because current valuations have been stretched as of late. “The ASX 200 has pushed through record highs in 2019 as the market embraces the prospect of a recovery in the economic outlook post the recent election and subsequent stimulus stemming from both interest rate and income tax cuts,” Morgan Stanley’s equity analysts noted.

That’s all the good stuff and if earnings season can come in on par with expectations then we’ll only have to worry about what Donald’s up to with his tariff teasing of the Chinese.

If company earnings disappoint and the economy doesn’t improve by Cup Day, I bet the RBA will cut the cash rate but we won’t be off to the races with the economy or stock market, if that happens. My optimism will have been misplaced.

Donald has increased the chances of a Cup Day (or even earlier) cut from Dr Phil.

The Switzer Listed Investment Conference is almost sold out, so be sure to claim your complimentary tickets as soon as possible by clicking on the event you would like to attend below:

• Sydney, Friday 16th August
• Melbourne, Tuesday 20th August
• Brisbane, Wednesday 21st August

The week in review:

• Looking at the all-time highs on the US and local stock markets, am I comfortable that the next crash shouldn’t happen any time soon?
• I also wrote about my interview with legendary Australian value investor Anton Tagliaferro.
• Paul Rickard looked at what you should do if the performance of your super fund falls short of its objective.
• Tony Featherstone wrote this week that, in times like these, extreme caution in the share market is warranted. However, 3 stocks have caught his attention, for those comfortable with small-cap investing and higher risk.
• James Dunn said that full-year reporting season is, in general, not going to be pretty.
• Our Hot Stock of the week from Fairmont Equities MD Michael Gable was FlexiGroup (FXL).
• In this week’s first Buy, Hold, Sell – What the Brokers Say, FNArena registered 24 downgrades and 7 upgrades in the first edition, while there were 10 downgrades and 5 upgrades in the second edition.
• In Questions of the Week, Paul Rickard answered queries about whether it is time to sell, stocks going ex-dividend, whether LICS are ‘set and forget’, and if you can write off an investment in a suspended company.

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday August 5 – Purchasing managers index services (July)
Tuesday August 6 – Job advertisements (July)
Tuesday August 6 – Reserve Bank Board meeting
Tuesday August 6 – International trade (June)
Wednesday August 7 – Lending (June)
Thursday August 8 – Speech by Reserve Bank official
Friday August 9 – Statement on Monetary Policy
Friday August 9 – Reserve Bank Governor testimony

Overseas
Monday August 5 – China Caixin services gauge (July)
Monday August 5 – US ISM services index (July)
Monday August 5 – US Total vehicle sales (July)
Tuesday August 6 – US JOLTS job openings (June)
Tuesday August 6 – US IBD/TIPP Economic Optimism Index (August)
Wednesday August 7 – NZ Reserve Bank Board meeting
Wednesday August 7 – US Consumer credit (June)
Thursday August 8 – US Wholesale inventories (June)
Thursday August 8 – China Exports & imports (July)
Friday August 9 – China Inflation (July)
Friday August 9 – US Producer prices (July)

Food for thought:

“Markets are never wrong – opinions often are.” – Jesse Livermore 

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

After the US Federal Reserve cut interest rates for the first time since December 2008, The New York Times published the following chart tracking the Fed’s target rate since 1985:

Top 5 most clicked:

• Will this current all-time high bull market turn into a bear market? – Peter Switzer
• Buy, Hold, Sell – What the Brokers Say – Rudi Filapek-Vandyck
• Up close and personal with a master of the market – Peter Switzer
• Has your super fund done better than 7%? – Paul Rickard
• 3 small-caps for yield – Tony Featherstone

Recent Switzer Reports:

Monday 29 July: Will the bull turn into a bear?

Thursday 01 August: Master of the market tips + 3 small caps for yield

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.