Weak Yuan Strongarms Markets

August 9, 2019

The trade fight between the U.S. and China took a brief turn for the worse on Monday as China allowed its currency to devalue against the U.S. dollar. The move was seen as a warning shot to Washington, intending to show that China can offset the effects of new tariffs by simply manipulating its global exchange rates. China’s precociousness by deliberately manipulating its currency unsettled markets, however, and seeded fears among investors that the conflict between the U.S. and China had entered a new phase of currency warfare. Investor reaction was sharp, and while the markets remained volatile for the remainder of the week, the worst-case scenario was avoided once China’s central bank took steps to stabilize the yuan. The market sustained a number of deep sell-offs through the week, but sentiment improved during each trading session, helping contain the week’s loss to just -0.75% on the Dow.

China Exports Defy U.S. Tariffs

In a week punctuated by trade concerns more broadly, China released its trade data for the month of July. Surprisingly, Chinese exports rose 3.30% year-over-year even as tariffs dampened demand from the U.S. China’s trade figures handily beat estimates for a -2.00% decline but it is worth noting that July’s figure may not be quite as good as they might otherwise seem, benefiting from some front-loading as companies have sought to purchase goods prior to new tariffs going into effect in September. The trade surplus between China and the U.S. fell to $27.97 billion in July, down from the previous month’s $29.92 billion. This is a small victory for the U.S. but is not all good news however, as overall Chinese imports declined -5.30% from the year ago period. The drop in imports comes as China’s growth has decelerated, and while that may marginally improve the U.S.’ negotiating position, it is bound to hurt a number of large U.S. exporters in the meantime.

U.S. Producer Prices Fall Flat

U.S. producer prices eked out a 0.20% rise in July. That helped nudge the Producer Price Index up 1.7% from the year ago period. Excluding the volatile food, energy and trade services components, producer prices actually fell -0.10% for the month. That was the first decline in core producer prices since October 2015 and it comes somewhat as a surprise given that U.S. tariffs on Chinese goods have largely targeted capital goods and not consumer goods. It is worth noting that the next round of tariffs announced last week, and which are expected to take effect in September, will hit consumer goods more significantly. While this may make a broad swath of items for the Back-To-School and holiday season more expensive, it is unlikely that it will significantly impact the overall consumer price index since the CPI basket is weighted more heavily on items such as housing, healthcare, and education which are not impacted by the trade war. Consequently, inflation looks like it will remain contained, which reduces the risk the Fed will have to change course in response to rising prices after having just cut rates a little over a week ago.

All is well that ends well, but it was anything but clear that we’d be able to say that when markets opened on Monday. In devaluing the yuan, China clearly wanted to send a message to the U.S. that it is nobody’s whipping boy and that it has its own set of “nuclear” options that could be played if the trade war continues to ratchet up. When faced with the potential for self-annihilation from capital outflows and economic delegitimization, however, China chose to backstop the yuan and the near-term crisis appears to have passed. A currency war remains an unlikely outcome simply because currency wars can be so difficult to contain. Still, the potential for more dust ups in the weeks ahead remains high as the Administration continues to amp up the voltage in an attempt to prod a reticent China back to the negotiating table.

The Week Ahead

A key snapshot of the economy comes next week with reports on retail sales and housing starts.

Mark Your Calendars: Probity Fall Celebration

Planning is underway for Probity’s annual fall celebration. Invitations will be mailed in early September so keep an eye on your mailbox for details. In the meantime, we wanted to share that this year’s event will be at the Stoneleigh Hotel on Thursday, October 17th.

Each year, we look for a location for our fall event that has historical, architectural, or cultural significance. The Stoneleigh has all of these in spades. The hotel opened in 1923 and was considered the most modern building in Dallas at the time. With 11 floors, it was the tallest hotel west of the Mississippi. The hotel was designed by Dallas architect F.J. Woerner in the Beaux Arts style. Residences on the top floors were occupied by wealthy Dallasites who enjoyed the city’s first luxury high-rise living. Every suite had electric lights, fans, telephones, and a circulating ice water loop. It was the first hotel in Dallas to offer air-conditioned guest rooms. Other amenities included a women’s sun parlor, a men’s smoking lounge, a children’s gymnasium, a beauty shop, a barber shop, three high speed elevators, a 40-car garage, and a grocery store.

Elvis Presley once stayed there as did Judy Garland, Frank Lloyd Wright, and numerous other celebrities. In 1936, owner Colonel Harry E. Stewart asked legendary interior designer Dorothy Draper to create what both the city of Dallas and The Stoneleigh were missing: a penthouse. Stewart added a 12th floor to create his 7,200 square foot “Scottish mansion in the sky” where he lived until selling the property to a friend in 1943.

The 11th and 12th floors include the penthouse, guest suites, ballroom, library bar, music room, and a terrace with spectacular views of Dallas. Details include marble floors, 500-year old English paneling, gold plated 18th century mirrors, eclectic art deco styling, and secret rooms and passageways that are rumored to have been used by mistresses visiting their paramours as well as by gamblers looking for a discreet escape route following illicit, late night poker games.

The hotel has long been an object of fascination in architectural and social circles. It was featured in Architectural Digest which covered the property’s two-year, $36 million renovation and restoration that was completed in 2008. Up until that renovation, the Stoneleigh was the longest continuously operating hotel in Dallas. The hotel is listed on the National Trust for Historic Preservation “Historic Hotels of America.” As such, the restoration was undertaken in consultation with The Texas Historical Society and the National Register of Historic Places to maintain the historic integrity of the period-style architecture and decor. An expose on the hotel by A.C. Greene, a much celebrated and respected Texas historian, was published in 1977 in D Magazine. Greene apparently spent a lot of time at the hotel bar, studying the guests, residents, and visitors. You can read Greene’s story here. It’s an intriguing explanation for why the property earned the moniker heartbreak hotel. D Magazine considers the article one of the best stories ever published on its pages.

Last year, the Stoneleigh was named 2018 Hotel of the Year by Marriott International. Today, 96 years after it was first opened, it retains its historic elegance and glamour combined with modern amenities and service. We hope to see you in October.





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