Federal Reserve Chairman Jerome Powell’s two days of congressional testimony calmed some investors’ nerves while bewildering others last week. Since 2015, the fed funds target rate have moved only one direction — up — after nearly eight years of a 0% target. But the current 2.5% is rich enough for now, according to Powell, who is more likely to join his colleagues in lowering rates rather than raising them through the rest of 2019.
While this economic expansion is truly historic in its longevity, the Fed sees signs of fraying. Arguments that some of the causes of this unease — the hot-and-cold trade war with China, heightening tensions with Iran, the now to-be-expected political posturing over the debt ceiling — could have been avoided are to some degree beside the point. The ongoing Brexit drama and the realignment of trade blocs that it engenders are also causing considerable uncertainty, as are other externalities.
“Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2% objective,” Powell told the Financial Services Committee. “However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy.”
Still, the debt ceiling is looming large and low. In a move that is bound to have leaders of both major political parties checking their membership cards, Treasury Secretary Steven Mnuchin warned House Speaker Nancy Pelosi that the government may run out of funds as soon as early September if Congress declines to raise U.S. borrowing authority.
At some point, even this seemingly endless expansion must end, and the Fed is guided by its responsibility to anticipate how and when that might happen in order to engineer a soft landing.
“The nation also continues to confront important longer-run challenges,” the chairman continued. “Labor force participation by those in their prime working years is now lower in the United States than in most other nations with comparable economies. … And I remain concerned about the longer-term effects of high and rising federal debt, which can restrain private investment and, in turn, reduce productivity and overall economic growth. The longer-run vitality of the U.S. economy would benefit from efforts to address these issues.”
Citing “crosscurrents from global growth and trade” that suggest growing weakness in the global economy, Powell indicated that many of his colleagues “saw that the case for a somewhat more accommodative monetary policy had strengthened.”
While Powell used the term “independent” or “independence” repeatedly during his opening remarks, it was in relation to the Fed’s relationship with Congress, not with the White House. Maybe he was subtly petitioning leaders on the Hill to intervene on the central bank’s behalf because not all economic signals this past week indicate that a rate cut would be the best move at this moment. Stronger than expected jobs numbers might suggest that the economy might still overheat, despite the venerable age of the recovery and that rates should actually continue to rise to head off inflation. Arguing in favor of rate cuts, though, is one other metric: six presidential tweets year-to-date in 2019 criticizing the Fed’s four rate hikes in 2018.
Specifically, the Labor Department’s core consumer price index jumped 0.3% in June, triple the usual recent posting, as producer prices increased a more modest 0.1%. Labor also reported the number of Americans filing applications for unemployment benefits last week dropped to 209,000 a three-month low.
Whatever the power dynamics, investors took the hint that, for the first time since the financial crisis, a rate cut might be on the horizon. In response, U.S. equities markets hit all-time highs with the Dow Jones Industrial Average gaining 0.55% for the week to close at 27,332.03. Meanwhile, the S&P 500 gained 0.72%, ending Friday at 3,013.77, its first close above 3,000. The Nasdaq Composite concluded the week 1.01% better at 8,244.14.
The yield on the 10-year Treasury note rose to 2.1310%, the highest level since June 11. The 30-year T-bond yield was also higher at 2.6535%. Swap rates remain lower than U.S. Treasuries with the 10-year USD swap rate trading at 2.065%.
U.S. gold futures rose 0.93% for the week to settle at $1,412.20 per ounce. In response to anticipated rate cuts, the dollar reversed course against an index of currencies weighted toward the euro, losing 0.19%.
Oil prices gained as the impending Hurricane Barry disrupted U.S. Gulf of Mexico crude output.
West Texas Intermediate futures rose nearly 5% this week while Brent climbed more than 4%.
I. U.S. Economic Data/Markets
- Small business owners remain upbeat, according to theNFIB Small Business Optimism Index. Although the figure dipped 1.7 points to 103.3 in June, the benchmark remains high.
- Job openings slipped 49,000 to a seasonally adjusted 7.3 million in May, according to the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS. The job openings rate dipped to 4.6% from 4.7% in April.
- Wholesale inventories rose by 0.4% in May, according to the Commerce Department, which also reported wholesale sales creeping up 0.1% that month. Sales could not keep pace, so the inventories/sales ratio for wholesalers inched up to 1.35 in May from 1.34 in April.
- Mortgage application volume fell 2.4% last week, seasonally adjusted, according to the Mortgage Bankers Association. That was despite an average rate drop from 4.07% to 4.04%.
II. Trade
- New orders for U.S. manufactured goods declined 0.7% in May, the second consecutive monthly drop, mostly due to lower demand for civilian aircraft and parts. Orders for non-defense capital goods excluding aircraft, which are seen by the Census Bureau as a measure of business spending plans on equipment, were up 0.5% in May.
- China’s exports fell 1.3% to $212.8bn in June, as trade tariff increases from the United States came into effect, while imports continued to weaken amid declining domestic demand, according to the General Administration of Customs in China.
III. Economics Outside the U.S.
- Chinese Economy
- Foreign direct investment rose to US$70.4 billion in the first half of 2019, 3.5% higher than a year earlier, according to the Ministry of Commerce. FDI growth was even more dramatic in renminbi terms. This result is in contrast to a widely held perspective that non-Chinese companies are growing wary about buying into this market.
- The producer price index showed no growth in June from a year earlier, fueling speculation that the trade war will trigger a manufacturing slowdown. The June PPI reading was the lowest since August 2016%.
- On a month-on-month basis, CPI fell 0.1% but rose 2.7% year-over-year.
- M2 money supply growth continued to hold steady between 8-9% over the past year-and-a-half. The data suggest China is keeping pace with deleveraging efforts despite domestic economic concerns.
- Eurozone Economy
- Industrial production in the eurozone jumped 0.9%, driven by consumer goods and led by France’s surge in factory output.
- German wholesale price inflation eased from 1.6% in May to only 0.3% in June, according to Destatis.
- Without credible explanation, Turkish President Recep Tayyip Erdogan cashiered his central bank governor Murat Cetinkaya. Doubts about the monetary authority’s independence sent the Turkish lira 2% lower against the dollar.
- U.K. Economy
- As if things could not get more complicated for the Conservative Party, their man in Washington’s private, unflattering thoughts about U.S. President Trump were made public. While those concerned with statecraft would support Sir Kim Darroch’s candor in his then-role as British ambassador to the U.S. as being a necessary part of the diplomatic process, politics and money have overridden such noble impulses. Darroch took the fall for the scandal and resigned his post. Such honorable behavior helped the Tories avoid further issues on top of what they are already dealing with: finding a successor to Prime Minister Teresa May in what looks to the rest of the world to be a less-than-democratic selection process — a situation rooted in the impending no-deal Brexit. Even if Brexit ends up following an orderly timeline, it would necessitate getting on better terms with non-European trading partners — such as the U.S., a relation which Darroch nearly trashed.
- GDP reversed course and grew 0.3% in May, thanks in large part to a dramatic increase in car manufacturing, according to the Office for National Statistics.
- Construction output fell in June at the fastest pace since the Great Recession plunging to 43.1, according to IHS Markit.
- “The core of the UK financial system, including banks, dealers and insurance companies, is resilient to and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit,” according to the Bank of England’s Financial Stability Report.
- Canadian Economy
- Housing starts surged to 248,138 in June as multifamily groundbreaking hit a record high and building permits for May rose 4.7%, separate reports showed.
- Housing starts surged to 248,138 in June as multifamily groundbreaking hit a record high and building permits for May rose 4.7%, separate reports showed.
- Japanese Economy
- Industrial production grew 2.0% in May, well below the widely expected 2.3%, according to the Ministry of Economy, Trade and Industry.
- Inventories rose 0.5%, slightly below estimates.
- The Bank of Japan’s producer price index for June fell 0.1% compared to a year before, marking the first decline in 30 months.
- Preliminary machine tool orders tumbled 38.0% in June, following a similar year-over-year drop of 27.3% in May.
Key data/events this week:
- Monday
- U.S. Empire State Manufacturing Index
- Canada new motor vehicle sales
- Tuesday
- U.S. Retail Sales
- U.S. Industrial Production
- U.K. Employment Change
- U.K. Average Earnings
- Eurozone Balance of Trade
- Eurozone Economic Sentiment Index
- Wednesday
- U.S. Mortgage Applications
- U.S. Housing Starts and Building Permits
- U.K. CPI and PPI
- Eurozone Inflation
- Thursday
- U.S. Leading Economic Indicators
- Eurozone Current Account
- Canada Retail Sales
- Japan Inflation
- Friday
- U.S. Consumer Sentiment
- Canada Retail Sales
