Stocks closed higher on Tuesday after an announced delay of planned tariffs on some Chinese imports brought buyers back to the equities market in a broad-based rally as
Apple led all three major indexes into the black following the announcement, which calmed fears over the U.S.-China trade war and growing signs of imminent recession.
Apple, a likely beneficiary of the tariff delay, rose 4.2% on Nasdaq, while the Philadelphia SE Semiconductor Index gained 3.0%.
Trade Representative Robert Lighthizer said the United States would hold off on imposing additional 10% tariffs on key Chinese goods, including laptops and cellphones, tariffs that were originally set to go into effect next month.
Consumer prices accelerated in July, with the core CPI, which strips out volatile food and energy prices, growing at 2.2% year-on-year, its largest gain in six months and well above the U.S. Federal Reserve’s 2% target.
The healthy inflation reading is unlikely to change market expectations for another interest rate cut from the Fed next month as it grapples with the U.S.-China trade war and its economic fallout.
The spread between 2-year and 10-year U.S. Treasuries hit its flattest level in 12 years, reflecting anxieties over trade and geopolitical turmoil. But yields rose across the board on news of the tariff delay.
The 11 major sectors in the S&P 500 closed in the black, with technology and consumer discretionary seeing the largest percentage gains.
Toys and footwear were among the Chinese goods temporarily spared from additional tariffs.
Nike rose 2.0%, while toymakers Hasbro and Mattel were up 2.7% and 4.6%, respectively.
Facebook pared gains, following a Bloomberg report that the company had hired outside contractors to transcribe user audio clips, ending the trading day up 1.7%.
Shares of CBS and Viacom gained 1.4% and 2.4%, respectively, after sources told Reuters the companies had reached an agreement in principle regarding their impending merger.
The second-quarter earnings season has reached the final stretch, with 453 of the companies in the S&P 500 having posted results. Of those, 73.3% exceeded consensus estimates, according to Refinitiv data.
Analysts see S&P 500 second-quarter earnings growth of 2.9% year-on-year, a significant improvement over the paltry 0.3% growth expected on July 1, per Refinitiv.
Approximately 7.95 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.34 billion share average over the past 20 trading days.
Consumer Prices Up Sharply
Consumer prices increased in July, but the acceleration in inflation will likely do little to change expectations that the Fed will cut interest rates again next month amid worsening trade tensions.
However, the probability is that the Fed will not reduce rates by half a percentage point at its Sept. 17-18 policy meeting, staying instead with a quarter point cut.
Meanwhile, the financial markets have fully priced in a 25-basis-point cut following a recent escalation in the bruising trade war between the United States and China, which sparked a stock market sell-off and caused an inversion of the Treasury yield curve, heightening the risk of a recession.
Fears about the impact of the trade tensions on our domestic economic expansion, the longest in history, prompted the Fed to cut its short-term lending rate by 25 basis points last month for the first time since 2008.
The Labor Department indicated that the consumer price index increased 0.3% last month, due in part to gains in the cost of energy products and a range of other goods,. The CPI had edged up 0.1% for two straight months. In the 12 months through July, the CPI increased 1.8% after advancing 1.6% in June.
Excluding the volatile food and energy components, the CPI gained 0.3% after rising by the same margin in June. The so-called core CPI was boosted by increases in prices for apparel, airline tickets, healthcare and household furnishings.
In the 12 months through July, the core CPI climbed 2.2%, the biggest gain in six months, after rising 2.1% in June.
The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6 percent on a year-on-year basis in June and has undershot its target this year.
Inflation has remained moderate despite the White House’s tariffs on Chinese imports as the duties have been largely on capital goods. That could change after President Donald Trump announced last month an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1.
The new tariffs would affect mostly consumer goods. Goldman Sachs estimates that tariffs have boosted year-on-year core PCE inflation by 10-15 basis points so far and that the new duties will add another 20 basis points.
In July, gasoline prices rebounded 2.5% after dropping 3.6% in June. Electricity rose 0.6%. Food prices were unchanged for a second straight month. Food consumed at home slipped 0.1%.
Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, was up 0.2% in July, the smallest gain since December 2018. Rents had risen by 0.3% for six straight months.
Healthcare costs rose 0.5%, the most since August 2016, after advancing 0.3% in June. There were increases in prices for hospital services, doctor visits and prescription medication.
The surge in healthcare prices suggests the core PCE price index likely rose solidly in July. The government will publish the July data later this month.
Apparel prices rose 0.4% after surging 1.1% in June. Used motor vehicle and truck prices increased 0.9% in July after rebounding 1.6% in the prior month. Prices for new motor vehicles fell 0.2%. The cost of household furnishings and operations increased 0.4%, rising for a third straight month.
Airline tickets rebounded 2.3%, the largest advance in a year. There were also increases in the costs of motor vehicle insurance, personal care products, tobacco and alcohol.
Tariffs to Be Delayed
The White House on Tuesday delayed imposing a 10% import tariff on laptops, cell phones, video game consoles and some other products made in China that had been scheduled to start next month, in an abrupt pull-back from a hardline stance on Chinese trade.
The Trade Representative’s Office action was published just minutes after China’s Ministry of Commerce said Vice Premier Liu He conducted a phone call with trade officials.
The delay provides some relief to retailers. Although most retailers would have had their holiday merchandise in stores even before the earlier September deadline, some might have faced the tariffs for fill-in orders late in the holiday shopping season.
The decision came less than two weeks after Trump said on August 1, that he would impose a 10% tariff on $300 billion of Chinese goods, blaming China for not following through on promises to buy more American agricultural products.
The exemptions, combined with renewed talks with China, suggest Trump may be willing to compromise.
Other products that will have tariffs delayed until Dec. 15 include “computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing,” the USTR said in a statement.
A separate group of products will also be exempt altogether, “based on health, safety, national security and other factors,” it added.
The announcement comes amid growing concerns about a global slowdown. Goldman Sachs said on Sunday fears of the U.S.-China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world’s two largest economies before the 2020 U.S. presidential election.
The Trade Representative’s Office will publish additional details and lists of the specific product types impacted by the announcement. The office plans to conduct an exclusion process for products subject to the additional tariff.
Household Debt increases
Americans increased their borrowing by 1.4% in the second quarter, a 20th straight increase, as more households took out loans to buy homes or refinance an existing mortgage, according to a report from the Federal Reserve Bank of New York.
Total household debt rose by $192 billion to $13.86 trillion, taking the level $1.2 trillion higher than the previous peak in 2008, the New York Fed’s quarterly household credit and debt report showed Tuesday.
Mortgage borrowing rose by $162 billion to $9.41 trillion, it said. Mortgage originations, which include mortgage refinances, increased by $130 billion to $474 billion, the highest volume seen since the third quarter of 2017.
Mortgage rates have fallen this year as the Fed held off on rate increases before cutting in July amid trade uncertainty and slowing global growth.
Student debt declined slightly to $1.48 trillion, which is typical in the second quarter. Newly issued auto loans totaled $155 billion, a $16 billion increase. Credit card balances increased to $868 billion from $848 billion.