Quarterly Market Commentary – 2019 Q2
- The ECB and the FOMC are both poised take action during their next meeting. The possible commencement of a new rate cutting cycle is giving a boost to the world equity market after a volatile May. Both central banks are citing prolonged trade disputes which may cause the already slowing global economy to take the next leg down. The central banks are again taking on the mantle of being the guardian to their economies.
- The Federal Reserve morphed from December’s position of more rate hikes, to January through May of being patient and pausing rate hikes, to the June pivot of being open to rate cuts due to outlook uncertainty and the muted inflation. The market is betting 100% that there is a rate cut in the July FOMC meeting with more cuts to come throughout 2019 and 2020.
- After a 3.2% Q1 real GDP, Q2 is expected to be closer to 2%. This causes concern about our economy expansion. But the sugar high induced 3% to 4% quarterly GDP growth fanned by the 2019 tax cut is behind us. We are now coming down from those highs and settling back into the trend growth of close to 2%. This does not feel good, but this does not mean slowing; it is just normalizing.
- The labor economy continues to chug along, producing an average of 172,000 new jobs per month in 2019, even though it is down from a 2018 average of 223,000. We expect the U3 unemployment rate to continue to come down and approach a near 3% rate even if new job creations begin to descend somewhat further at this 10-year old expansion.
- Inflation, as measured by Core CPI and Atlanta Fed’s Sticky CPI/Core CPI, is above the Fed 2% target while the PCE for May remains at 1.5%. Wages are continuing to grind higher as more labor slack is absorbed, and sooner or later, we will see even more wage inflation.
- China trade, and to a lesser extent new disputes with Japan and Europe (Germany), not only catch the headlines but are adding increasing uncertainties to the global economy. The disruption in global supply chain is creating confusion for businesses everywhere. However, we do not see an end to the friction between the U.S. and China anytime soon. The trade dispute masks a deeper political motive of keeping China from rising and rising quickly. This threat is almost existential to both countries and cannot be overcome easily.
- Although we do not deem a rate cut, let alone the beginning of a rate cut cycle, is warranted based on economic data, the FOMC will likely take action this year. By further reducing its policy bandwidth, FOMC will have few bullets left when the next recession comes.
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