Highlights
• On again/off again trade negotiations may temper corporate budgets
• The Fed may lower rates to sustain the expansion; clear messaging crucial
• Global economic activity continues to disappoint
As the second half of 2019 begins, the close of the first half looks diametrically different than the conclusion of 2018, which saw a market enveloped by gloom and a Federal Reserve seemingly intent on injecting even more despair this year. And then at the start of the year came a “patient” Fed, and with it a market that climbed faster and higher. Mounting concerns over trade relations and all things “tariff,” with an ever-growing list of countries including China, Mexico, Japan, India and the European Union, began to take a toll on corporate spending, manufacturing data, and worries that the labor market, while still strong, was slowing. Add escalating geopolitical risk focused on the Middle East and momentum in the equity market slowed. Still, Federal Reserve Chairman Jerome Powell again assured markets that the Fed will “act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
Chairman Powell’s comments, coupled with similar remarks from several Fed officials, as well as a host of global central bank representatives, have helped sustain markets and fueled hopes that interest rate cuts are forthcoming this summer. Indeed, at any point where it looked as though the Fed may not be as generous with rate cuts, the markets—and President Trump—have reacted none too kindly. Mr. Trump, who wants lower rates across the board and a weaker U.S. dollar to underpin the economy and markets, recently said, undoubtedly facetiously, that he’d rather have outgoing European Central Bank president Mario Draghi “instead of our Fed person,” and maintained that he has the right to demote or fire Mr. Powell. “He has to lower interest rates to help us compete with China,” he said in a recent interview.
Despite the charged atmospherics between the president and the Fed chair, the Fed’s dovish comments have helped the markets. At the end of the second quarter, the Fed funds futures are pricing in a 100 percent chance of a quarter-point interest rate reduction at the July 31 Federal Open Market Committee (FOMC) meeting, and Chairman Powell has yet to walk back market projections. However, when asked at the FOMC press conference in June whether there would be a 25 or 50 basis points move in rates, Powell remarked that it will “depend very heavily on incoming data and the evolving risk picture as we move forward.”
This has been the best first half of the year for the S&P 500 since 1997, with the S&P capturing a new high. Much of the gains can be attributed to global central bank comments designed to calm markets by suggesting that monetary help is on its way if need be. And as the calendar turns the page to the third quarter, futures markets are signaling a roaring celebration.
The Tariff Truce—Negotiations ‘Back On Track’
Following President Trump’s announcement that trade negotiations with China are “back on track,” a long list of prominent U.S. business groups issued statements applauding the truce, but still wanted to see in-depth details. The U.S. Chamber of Commerce echoed the remarks of its members in seeking an “enforceable agreement” that leads to Beijing opening its markets while implementing stronger protection for intellectual property. The Business Roundtable, comprised of U.S. CEOs, sought to have China and the U.S. negotiate an agreement that “addresses structural issues in China and removes tariffs.” The president of the National Association of Manufacturers said manufacturers in the U.S. have paid the price while China has “reaped the rewards of its unfair trade practices, intellectual property theft and exploitation of existing trade agreements.” The Information Technology Industry Council commended the “pragmatic and direct discussions” between the two sides. Because of what is being interpreted as a key turnaround in its previous ban on selling components to Chinese tech giant Huawei based on national security concerns, the Semiconductor Industry Association is seeking additional information.