BMA Market Insights: All Eyes on the Fed


It has been a while since an actual recession reverberated through the world’s leading economies. Perhaps that is any deceleration of their gross domestic products causes pearl-clutching on the fainting couches in the parlors of their monetary authorities.

Witness the recent comments out of the European Central Bank.

“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged” ECB President Mario Draghi announced last week. “We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.”

The words that had equities speculators yacht shopping while currency traders sent their assistants out for antacid tablets were “or lower”. Draghi went on to state that the ECB will also keep buying back bonds in order to inject further liquidity into capital markets.

This comes just a week after Draghi’s opposite number, Federal Reserve Chairman Jerome Powell offered similarly themed testimony to the U.S. Congress. While the Bank of Japan never got around to raising rates in the first place. That, though, is because it faces a much different set of issues than the rest of the world. Although it seeks to maintain optimal employment and inflation, just like every other central bank, the BoJ has a large manufacturing economy and an aging average workforce population to grapple with. 

Last week, incoming data showed that the U.S. GDP grew at a 2.1% annualized rate in the second quarter slightly ahead of expectations. This was significantly lower than the 3.1% posted in the first quarter, but consecutive quarters of three-percent-plus GDP growth is, in historical terms, not the general rule of thumb. Digesting this news, all three major U.S. indices rose last week. The S&P 500 and Nasdaq posted impressive gains of 1.7% and 2.3%, respectively. Meantime, the Dow eked out a 0.1% advance.

Despite all the talk of future interest rate cuts, Treasury yields rose during the week. Shortly after the end of the trading day Friday, the benchmark 10-year note’s yield reached 2.074%, while that of the 30-year bond reached 2.594%.

While the screen rate on the U.S. 2-year swap spread remains positive with the 2-year U.S. treasury note yielding 1.859% and 2-year USD swaps trading at 1.892%, borrowers continue to swap its floating rate funding exposures as the negative basis continues to be attractive.  Overall, week-over-week, the U.S. yield curve slightly flattened. At the last read, the 10-year USD swap rate traded at 1.998%. 

After a bit of a rollercoaster ride midweek, gold prices firmed, with spot gold trading at around $1,420 per ounce in early London trading Monday.

U.S. West Texas Intermediate crude rose 18 cents to settle at $56.20 a barrel late Friday, a weekly gain of more than 0.5%, rebounding off a 7.5% drop the previous week.

Regardless of what the ECB ends up doing, the more immediate question is what the Fed is planning. This Wednesday should reveal whether Washington follows through on its hints of a rate cut or if it holds targets where they are for at least another month. Fed Funds futures traders all but gave up on its bet of a 50bps rate cut this Wednesday, though am expecting a monthly back-to-back 25bps cut. The market will be keen on the Fed Chair’s conference speech post-meeting.

I.   U.S. Economic Data/Markets

  • The Federal Reserve Bank of Chicago’s  National Activity Index rose to -0.02 in June from -0.03 in May, falling short of expectations of 0.1. The index tracks overall economic activity and related inflationary pressure. A negative reading is not necessarily a contractionary signal; it only means that indications suggest below-trend growth.
  • The Richmond Fed’s manufacturing activity index showed a weakening in July, falling from 2 in June to −12 in July, its lowest reading since January 2013, as all three components — shipments, new orders, and employment — registered declines.
  • U.S. crude oil inventories fell by 10.8 million barrels, according to the Energy Information Administration. Analysts expected a decrease of only 4 million barrels, but either findings or expectations might still be tainted by the effects of Hurricane Barry.
  • Wholesale inventories at the end of June, adjusted for seasonal variations but not for price changes, were estimated at $680.0 billion, up 0.2% from May, and were up 7.9% year-over-year. Retail inventories, similarly adjusted, were estimated at an end-of-month level of $662.4 billion, down 0.1% from May, and were up 4.4% year-over-year.
  • New orders for manufactured durable goods in June increased by 2.0% to $246.0 billion.
  • According to the Census Bureau, following two consecutive monthly decreases. Shipments of manufactured durable goods were for a second consecutive month, increased 1.4% in June to $258.2 billion.
  • Initial jobless claims decreased by 10,000 to a seasonally adjusted 206,000 in the week ended July 20, according to the Labor Department. This was better than expectations, as economists anticipated an increase.

II.  Trade

  • America’s trade deficit was $74.2 billion in June, down $0.9 billion from May, according to the Census Bureau. Exports of goods for June were $136.3 billion, $3.7 billion less than May exports. Imports of goods for June were $210.5 billion, $4.6 billion less than May imports.

III.  Economics Outside the U.S.

  • Chinese Economy
    • Industrial firms earnings fell 3.1% in June on a year-over-year basis, according to the National Bureau of Statistics.
  • Eurozone Economy
    • Consumer confidence increased from -7.2 to -6.6 in July. The implication for household consumption is moderately positive heading into the third quarter.
    • IHS Markit’s Flash Eurozone PMI Composite Output Index dropped to at 51.5 from June’s 52.2. A deepening manufacturing downturn was accompanied by a slight moderation in service-sector growth. Selling prices came under pressure amid tough competition and weak demand.
    • The M3 money supply gained 4.5% in June, more or less in line with the expected 4.6% year-over-year read.
  • U.K. Economy
    • Newly anointed Prime Minister Boris Johnson was greeted at No. 10 Downing Street by some less-than-cheery news. The National Institute of Economic and Social Research revealed that the planned hard Brexit may already have triggered a recession in the U.K.
    • The Confederation of British industry reports that U.K. manufacturing output fell in the May-June-July period. Simultaneously, business sentiment and investment intentions deteriorated, and stockpiling activities slowed, according to the CBI.
  • Canadian Economy
    • Canadian wholesale trade fell 1.8% in May after five months of gains, according to Statistics Canada, despite economists’ prediction of an increase. Motor vehicle and auto parts sales led the retreat.
    • Statistics Canada reported that wholesale inventories increased for a ninth consecutive month, jumping 1.1%, while sales volume decreased by 1.9%.
    • Average weekly earnings for Canadian workers rose 3.4% in May from a year earlier to C$1,031 ($784), according to Statistics Canada, as employers added 32,600 jobs.
  • Japanese Economy
    • The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index edged up to a seasonally adjusted 49.6 in June, but stayed below the 50.0 threshold that separates contraction from expansion. While factory output, total new orders, and new export orders contracted, the country’s services sector showed signs of improvement.
    • Core consumer price index, which includes oil products but excludes fresh food prices, rose 0.6% in June from a year earlier. The so-called core-core CPI, which strips away the effects of volatile food and energy costs, was up 0.5% in June from a year earlier. This is the tamest Japanese inflation read in two years.

Key data/events this week:

  • Monday
    • U.S. Texas manufacturing outlook
    • Japan employment
    • Japan industrial production
  • Tuesday
    • U.S. personal income and spending
    • U.S. PCE deflator
    • U.S. Case-Shiller home prices
    • U.S. Conference Board consumer confidence
    • U.S. Moody’s policy uncertainty index
    • Eurozone business and consumer sentiment
    • China PMI
  • Wednesday
    • U.S. monetary policy
    • U.S. agricultural prices
    • U.S. ADP employment
    • U.S. recession risk
    • Japan monetary policy
    • Japan consumer confidence
    • Germany retail sales
    • Eurozone unemployment
    • Eurozone GDP
    • Eurozone preliminary CPI
    • Canada Industrial Product and Raw Materials Price Indexes
    • Canada industry output
  • Thursday
    • U.S. Challenger report
    • U.S. jobless claims
    • U.S. construction spending
    • U.S. St. Louis Fed Financial Stress Index
    • U.S. ISM Manufacturing Index
    • U.S. vehicle sales
    • U.K. monetary policy
  • Friday
    • U.S. international trade
    • U.S. factory orders
    • U.S. Michigan consumer sentiment survey
    • Eurozone retail sales
    • Canada international merchandise trade