Dow Near All-Time High as U.S.-China Strike A Deal, Kind of
October 11, 2019
Trade talks resumed this week with growing market optimism that the U.S. and China would break a five-month stalemate and ink a limited trade deal. The talks took place in advance of next week’s deadline when U.S. tariffs were scheduled to increase from 25% to 30% on $250 billion worth of Chinese goods. It was an otherwise sparse week for economic news with reports on inflation and the release of the Fed’s September meeting minutes being the only notable releases. The Dow Jones Industrial Average jumped 300+ points on Friday as news emerged in the final minutes of trading that a deal had been reached between the parties. This brought the weekly return to 0.91% for the week – a mere 2.00% below the Dow’s all-time high.
Price Increases Remain Modest
Despite the “tariff drag” from the U.S.-China trade battle, businesses and consumers have seen little change in the cost of goods and services. In fact, businesses actually saw prices fall during the month of September, where producer prices dropped -0.30% — their biggest decline in eight months. On a year-over-year basis, producer prices have risen just 1.40% for their smallest increase in nearly three years. The weak inflation reading is consistent with recent global economic data, where the impact of lower global demand has more than offset the higher costs from tariffs. Inflation at the consumer level remained unchanged in September, with year-over-year prices rising a mere 1.70%. The 12-month inflation figures running just below the Fed’s 2.00% target level give the Fed some leeway on an additional cut later this month.
Fed Minutes Highlight Trade Concerns
Trade was the week’s hot topic overall and a point of conversation in particular at the Federal Reserve’s September meeting. The central bank released its September meeting notes this week and “trade” garnered 28 mentions. They specifically noted that the U.S.-China trade impasse was causal in the current global economic slowdown and they singled out the trade war as the key risk to derailing the U.S. economic expansion. The Fed went on to identify business investment, manufacturing, and exports as being particularly vulnerable – areas which data has recently confirmed are all experiencing downturns in recent months. On a positive note, the central bank remains encouraged by the strength of the consumer, who accounts for two-thirds of U.S. economic growth. Aside from trade concerns, policymakers noted their sensitivity to the disruption in financial markets due to the recent volatility in overnight lending markets that resulted in a spike in short-term rates. The central bank has responded to the volatility with several liquidity actions aimed at stabilizing the market, and on Friday, the Fed announced it would extend these actions into at least January in order to provide short-term markets additional time to regain their footing. The Fed minutes reflected much of what was already known about the Fed’s current thinking, with depth of the internal trade discussion being the incremental item.
Markets reacted positively this week on the prospects of a U.S.-China trade deal. It should be noted that we have been here before. It was not so long ago, May in fact, that a trade deal was all but in hand only for it to slip away just after the market had closed for the week. As we write this, however, it appears that indeed some form of agreement has been reached. Any such deal is likely to be a phased agreement intended to pave the way for additional and more substantive agreements down the road; and while few details have yet to be released, even if today’s deal proves to be only partially material, it could set a very positive tone as CEOs and traders prep for the beginning of Q3 2019 earnings calls next week.
The Week Ahead
Consumers have been carrying the economy through the recent trade war. We’ll see if they will continue to do so with the latest reports on retail sales and housing starts. Markets gear up for the start of the Q3 2019 earnings season with notable releases from financial and industrial names.
Spice Wars
It’s finally here. The weather has broken and we’ve had a peek into sweater weather, and it has been glorious. Pumpkin patches are popping up around town, and Starbucks is peddling its pumpkin spice latte once again. However, underneath the warm welcome of everything related to fall, the spice in pumpkin spice — a mixture of cinnamon, cloves, ginger, and nutmeg — has a surprisingly sinister history. Nutmeg specifically has an intriguing backstory involving trade wars, smuggling rings, monopolies, genocide, and ruthless colonialism.
A nutmeg tree produces two spices — nutmeg and mace. The fruit itself is shaped like an apricot or plum and when it matures it partially splits in two, exposing a red layer of pulp with the seed in the middle. The red layer is the mace, and the meat inside the seed is the nutmeg. The nutmeg is harvested by drying the seed for two months until the inner nut rattles inside the shell. The shell is then removed to reveal the nutmeg. The nutmeg trees are indigenous to the Banda Islands, a string of ten islands located between the Indian and Pacific Oceans in what is now Indonesia. The total area of the islands is less than 70 square miles.
Up until the 19th century, nutmeg and mace came exclusively from the Bandas. The area’s location, weather, soil, and the finicky nature of the nutmeg tree kept the price astronomical. Nutmeg will only grow in specific conditions: fertile, well-drained soil in a tropical climate with lots of rain. The trees only bear fruit after seven to nine years, and the harvesting process is labor and time intensive. In the 1500s and 1600s, the spice was worth more than its weight in gold, and traders could mark up a shipload of nutmeg as high as 60,000 percent. Nutmeg was exotic, scarce, and highly desired by the wealthy. In addition to its culinary uses, it was considered medicinal and used for a variety of ailments from colds to stomachaches and was believed to be a cure for the plague. It was also thought to have hallucinatory effects in large quantities.
The Bandanese successfully managed their nutmeg plantations and trading operations while working with Arab and Asian spice merchants who kept the origin of the valuable spice a closely-guarded secret. A single cargo of nutmeg could bring enormous wealth to its traders, so the Dutch, English, Portuguese, and Spanish had been trying to find the location of the “spice islands” and work their way into the highly profitable nutmeg trade. In fact, historians note that it was the main motivation for Europe’s age of exploration, the creation of the British East India Company, and the formation of the Dutch East India Company.
In the 1500s, the Portuguese were finally able to locate the islands and began bringing ships loaded with the rare spice to Europe. The Dutch and English eventually found the famed spice islands and fought ferociously for control of the nutmeg monopoly. The Dutch led a brutal attack on the local Bandanese in 1621, killing or enslaving the majority of the native Banda population. At the end of the massacre, only about 1,000 of an estimated 15,000 Bandanese had survived. The Dutch and English fought over the Bandas until 1667 when the English agreed to end their claim to the Bandas in exchange for an island the Dutch considered worthless: New Amsterdam — a new colony that the English renamed New York.
In the 1700s, nutmeg seeds and plants were smuggled out of the Bandas to Mauritis, an island in the Indian Ocean off the eastern coast of Africa, where they were cultivated and flourished. Nutmeg was then exported and cultivated in Singapore, India, Sri Lanka, and the Caribbean where it also thrived. This contributed to the end of the nutmeg monopoly. Today, the Bandanese have regained control over their islands and their nutmeg, and the Banda Islands are a tranquil tourist destination popular among scuba divers.