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Trade war intensifies – What to know in the week ahead

Another wild week in the markets sent the Dow lower by more than 600 points last Friday alone, as investors considered the latest escalations in the U.S.-China trade war. Against this back-drop, this week is poised to be another busy one for markets.

As the situation stands now, President Donald Trump on Friday unleashed another hike on the rate of tariffs for some Chinese goods. This announcement came after China earlier in the day Friday announced it planned to impose new tariffs on $75 billion worth of U.S. imports – a move that itself had been a response to the Trump administration’s previously announced tariffs set to take effect in September and December.

“This illustrates the speed at which the trade war is now escalating and there is no way of knowing where it will end,” Paul Ashworth, chief U.S. economist for Capital Economics, said in a note. “It is fears about where the trade war is going that will now weigh even more heavily on financial markets and business investment in the coming months – and that is where the real damage to the US economy will be done.”

Indeed, White House spokeswoman Stephanie Grisham said on Sunday that Trump “regrets not raising the tariffs higher.”

Investors will be monitoring the trade situation, and piecing together new U.S. economic data releases for signs of whether this trade sparring has weakened some of the last bastions of strength in the domestic economy.

Recent data has highlighted a bifurcation in the U.S. economy as the trade-sensitive manufacturing sector softened, while the consumer-led service sector held up more strongly.

U.S. President Donald Trump gestures during family photo session at the G7 summit in Biarritz, France August 25, 2019. REUTERS/Christian Hartmann/Pool

“The next batch of activity data for July are likely to highlight the divergence between the struggling manufacturing sector and resilient consumers, with core durable goods orders dropping back but real consumption rising at a solid pace,” Andrew Hunter, senior U.S. economist for Capital Economics, wrote in a note Friday.

Manufacturing activity indices from the Dallas and Richmond Federal Reserves are both expected to show negative readings again for August, albeit slightly less so than from July. These surveys come on the heels of a report from IHS Markit last week showing U.S. manufacturing activity slid into contractionary territory in August, reaching the lowest level in nearly a decade.

Moreover, orders for durable goods, or manufactured products intended to last at least three years, are expected to have risen at a slower pace in July from June, according to consensus economists. And non-defense capital goods orders, excluding aircraft, are expected to have been flat in July. These orders are widely seen as a proxy for future business investment. Data on durable goods and capital goods orders are set for release Monday.

Economists have widely pointed out that the trade uncertainty has muddied visibility for businesses, making it difficult for them to commit to capital projects and make plans to build out their operations.

“That’s part of the reason we see the divergence between what’s happening with investment, where you see investment being very weak, as opposed to consumer spending, which is much healthier,” International Monetary Fund chief economist Gita Gopinath said in an interview with Yahoo Finance last week.

But the consumer has remained a stronger part of the U.S. economy, as evidenced by July’s estimates-beating retail sales figures, as well as better-than-expected results from retailers including Target (TGT) and Walmart (WMT) this earnings season.

Economists expect that the second print on second-quarter U.S. gross domestic product – which is set for release Thursday – will affirm this stance. The first print showed growth of 2.1% in the second-quarter, beating expectations. This had been driven by much better-than-expected personal consumption expenditures (PCE), which grew 4.3%, or the most in six quarters.

Consensus economists expect the second print to show the U.S. economy grew 2.0% in the second quarter, just short of the first print’s results. PCE is expected to remain unrevised, however.

Earnings calendar

Monday: N/A

Tuesday: The J.M. Smucker Company (SJM) before market open; Hewlett Packard Enterprise Company (HPE), Autodesk (ADSK) after market close

Wednesday: Coty (COTY), Tiffany (TIF), Brown-Forman Corporation (BF-B) before market open; H&R Block (HRB), PVH (PVH), Okta (OKTA) after market close

Thursday: Dollar Tree (DLTR), Dollar General (DG), Best Buy (BBY) before market open; Ulta (ULTA), Workday (WDAY) after market close

Friday: Campbell Soup (CPB) before market open

Economic calendar

Monday: Chicago Fed National Activity Index, July (-0.02 prior); Durable goods orders, July preliminary (1.3% expected, 1.9% prior); Capital goods orders non-defense excluding aircraft, July preliminary (0.1% expected, 1.5% prior); Dallas Manufacturing Activity Index, August (-1.0 expected, -6.3 prior)

Tuesday: FHFA House Price Purchase Index, 2Q (0.2% expected, 1.1% prior); S&P CoreLogic CS 20-City Composite Price Index, MoM (0.20% expected, 0.14% prior); Richmond fed Manufacturing Index, August (2 expected, -12 prior); Conference Board Consumer Confidence (130.0 expected, 135.7 prior)

Wednesday: MBA Mortgage Applications, week ended August 23 (-0.9% prior)

Thursday: 2Q GDP annualized QoQ, second print (2.0% expected, 2.1% prior); 2Q personal consumption, second print (4.3% expected, 4.3% prior); 2Q GDP price index, second print (2.4% expected, 2.4% prior); 2Q core PCE QoQ (1.8% prior); Advance goods trade balance, July (-$74.0b expected, -$74.2b prior); Wholesale inventories MoM, July preliminary (0.0% prior); Initial jobless claims, week ended August 24 (209,000 prior); Continuing claims, week ended August 17 (1.674 million prior); Pending home sales MoM, July (0.0% expected, 2.8% prior)

Friday: Personal income, July (0.3% expected, 0.4% prior); Personal spending, July (0.5% expected, 0.3% prior); PCE deflator MoM, July (0.2% expected, 0.1% prior); PCE deflator YoY, July (1.6% expected, 1.6% prior); MNI Chicago PMI, August (48.0 expected, 44.4 prior); University of Michigan Sentiment Survey, August final (92.5 expected, 92.1 prior)

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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