Stockholm (Ekonamik) – On Wednesday last week, the Dow Jones Industrial Average recorded its worst percentage one-day drop of the year and fourth-largest point drop of all time. The Dow dropped around 800 points or 3.1%, whereas the S&P 500 fell 2.9% on the same day as the main measure of the yield curve inverted briefly inverted on Wednesday and triggered investor worries over a potential recession. Argentina’s stock market saw its market value halve in one day after President Mauricio Macri suffered an unexpected defeat in primary elections in the prior weekend.
Government Deficit, Consumer Prices, Wages, and Unemployment
The U.S. government’s deficit for the first ten months of the fiscal year ending September widened to $867 billion, up 27% from the same period last year, according to data released on Monday by the Treasury Department. The White House’s Office of Management and Budget predicts that the deficit will reach $1 trillion for the fiscal year ending September, compared with the deficit of $779 billion for the fiscal year 2018. In the ten months through the end of July, tax revenue increased by 3% year-over-year to $2.86 trillion and federal spending was up 8% year-over-year. The federal spending is going to increase as President Donald Trump recently signed into law a two-year budget deal that will raise spending by $320 billion over the next two years.
Consumer prices in the United States increased 0.3% in July on a seasonally adjusted basis, following a 0.1%-increase in June, according to the U.S. Bureau of Labor Statistics. The increase in consumer prices was mainly attributable to higher gasoline prices and cost for rent. On an annualized basis, the consumer price index for all items increased by 1.8%. Excluding food and energy costs, the index was up 2.2% over the last 12 months.
Consumer prices in Germany rose 1.7% in July compared with the same month of last year, according to the Federal Statistical Office, Destatis. This was the highest rate of increase since April. The inflation rate, as measured by the consumer price index, rose by 0.5% month-over-month in July. Compared with July of last year, energy product prices increased at an above-average rate of 2.4% year-over-year and food prices climbed 2.1% year-over-year.
The Federal Statistical Office also reported that the real gross domestic product in Germany decreased by 0.1% relative to the first quarter of 2019, after adjusting for seasonal and calendar variations. The annualized output growth slowed to 0.4% in the year to June after exports recorded a stronger quarter-on-quarter decrease than imports.
According to the U.K. Office for National Statistics, average weekly earnings for employees (excluding bonuses) increased by 3.9% year-over-year in the past 12 months through the end of June. This was the highest jump in wages since June of 2008, suggesting that Brexit uncertainty is not affecting pay packets. The highest rate of growth in the average weekly pay was recorded in the construction sector, where pay increased by 5.9% in the year to June.
The Office for National Statistics also reported that the unemployment rate rose to 3.9% from 3.8% a month ago after the number of unemployed people increased by 31,000 in the three months to June to 1.33 million. Employment, meanwhile, increased by 115,000 to reach a record high of 32.81 million.
Argentina Faces Turmoil
An unexpected defeat of Argentina’s president, Mauricio Macri, in the country’s primary elections last weekend to Alberto Fernández, whose running made is former president Cristina Fernández de Kirchner, triggered a 48% plunge in Argentina’s stock market index on Monday. Alberto Fernández received 47.7% of the votes in a pre-electoral nationwide test of sentiment, as voters punished Mauricio Macri for an austerity programme that has caused a deep recession, high unemployed and high inflation. Argentina’s presidential elections take place on October 27. Investors fear that the populists will undo Macri’s progress in regaining the trust of domestic and foreign investors if they win power in October.
Delayed Tariffs and Second-Quarter Earnings
Last month, President Donald Trump announced a 10% tariff on $300 billion worth of Chinese imports, which were supposed to take effect on September 1. On Tuesday last week, President Trump unexpectedly pushed the new tariffs on many Chinese goods, including mobile phones, laptops and toys, to December 15. Other items facing a 10% levy will go ahead on September 1. The President acknowledged that the delay was in part to avoid affecting American shoppers during this Christmas shopping season.
Of the 90% of companies in the S&P 500 that already reported their financial results for the second quarter, 75% registered a positive earnings-per-share surprise and 57% reported a positive revenue surprise. According to FactSet, the blended earnings decline for the S&P 500 is 0.7%. The blended estimate combines actual results for companies that already reported and estimated results for the companies yet to release their quarterly financial statements. If the 0.7%-decline is the actual outcome for the quarter, companies in the S&P 500 will suffer a second consecutive quarter of year-over-year declines in earnings. The blended revenue growth rate reached 4.1%, one of the lowest growth rates for the index since the third quarter of 2016.
Stocks Fall, Gold Prices Rise
Last week, stock prices declined for a third consecutive week on the back of renewed yield-curve worries and persisting signs of a global economic slowdown. The difference between the yields on the 10-year U.S. Treasury and the two-year U.S. Treasury inverted briefly last week for the first time since 2007, reflecting worries about an economic slowdown.
The S&P 500 fell by 1% last week, cutting the year-to-date return to 15.2%. The Dow Jones Industrial Average retreated 1.5% during the week, which brought the year-to-date gain to 11%. European equity markets also posted some losses last week. The pan-European STOXX Europe 600 Index fell 0.5%, the FTSE 100 Index of the U.K. declined by 1.9%, the export-heavy German DAX was down 1.2% and Italy’s FTSE MIB Index fell 2.5%. A technical glitch prevented the FTSE 100 from opening for nearly two hours on Friday morning.
Japanese and Chinese equities also suffered mild losses last week. The Nikkei 225 Stock Average and the Shanghai Composite Index were down 1.2% and 1.5% last week, respectively. The large-cap CSI 300 Index, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, was up more than 2% last week.
Last week marked the third consecutive week of gains for gold. West Texas Intermediate crude oil edged up 0.7% last week to around $55 per barrel, while the Brent crude oil gained just 0.2% last week. The CBOE Volatility Index, known as the VIX or the fear gauge in stock markets, closed at 18.47 on Friday, after hovering above the 20-level during the week.