We find ourselves in genuinely rarified air as investors. The unemployment rate stands at a multi-decade low, unemployment among minority workers is at historic lows, and equity market indices are trading at record highs. Additionally, by historical standards, interest rates are relatively low, manufacturing has rebounded dramatically in recent years, the Labor Force Participation rate has leveled off over the past two years for the first time in over a half-century, and yet, the Federal Reserve is giving indications that a rate cut is on the horizon.
Further, this week’s Q2 GDP release is expected to reflect very robust consumer spending (+3.9%). Consumer sentiment, as measured by the University of Michigan, currently matches a 15-year high, as the chart above illustrates. Richard Curtain, director of the University of Michigan’s consumer survey, summarizes:
Favorable trends in personal finances remained widespread. These favorable financial expectations were supported by gains in household incomes and wealth.
Given all these positive data points, what exactly is pushing the Fed to cut rates? What role, if any, has President Trump played in the shift to lower rates? Has the market forced the Fed’s hand? Has fear of economic deterioration due to stalled trade talks fueled a proactive move by the Federal Reserve? Has the compression in yields across the curve effectively backed the Fed into a corner of sorts? First off, as far as the impact or role President Trump has had on the Fed’s monetary policy, I would say it is non-existent. The market’s current yields across the treasury curve, and increasingly strident concerns over trade and global expansion, however, have and will continue to have a meaningful impact on Fed interest rate policy and outlook.
Given that central banks around the world all appear to be on the same page of providing accommodation, it is clear that fear of slowing global economic expansion is a shared concern. It is certainly informing the Federal Reserve’s FOMC narrative. With a slowing global economy and ever-increasing size in the aggregate number of bond offerings sporting negative returns, there appears to be increasingly little risk of runaway inflation. Inflation, as measured by nearly every measuring stick here in the US, is shy of Fed target, despite the longest-running bull market and economic cycle in memory.
If there is no inflationary-induced caution, and there is fear of continued economic lethargy, there is little downside, initially, to lower rates. The assumption being that lowering rates will encourage borrowing and expansion. It may work. When the Fed raised for the last time in this cycle, back in Q4 of 2018, I suggested it was in large part a result of attempting to give the Fed a higher benchmark from which to cut rates. At the time there appeared little justification for the last raise in rates away from that–in my opinion. Fast forward to where we stand today (Q3), and it appears to have been the case. Inflation has remained stubbornly tame, while economic expansion has remained constructive, though there have been clear indications of slowing in forward-looking economic data.
Away from the dominant conversation about the shift lower in rates by the Federal Reserve, earnings this week will provide much of the narrative. As Chief Investment Strategist Sam Stovall points outs in his note from last week, CFRA is expecting:
Q2 earnings reports, which are now projected to decline 1.3%, year on year, according to S&P Capital IQ consensus, estimates for the S&P 500 index, versus the estimated drop of 2.0% on 7/12/19. EPS should be followed up with an additional 0.8% slip in Q3.
Thus far, this earnings season there has been little in the way of surprises. Financials dominated last week’s earnings calendar and provided largely in-line results for Q2. This week the earnings narrative will turn to tech. Facebook and Tesla are reporting after the close on Wednesday. Alphabet, Amazon, and Starbucks are reporting after the bell on Thursday. Twitter is reporting before the opening bell on Friday. Though there are still some financials left to report, the dominant theme this week will be provided by the companies outlined above.
Economic Calendar Highlights:
- June’s Existing Home Sales data is released at 10:00 am. May’s results – Level – SAAR were 5.340 M. Econoday consensus is calling for unchanged results in June versus May. May’s results were 2.5% above April’s. On a Y/Y basis, Existing Home Sales have ticked lower by 1.1%, as of last month’s report.
- June’s New Home Sales – Level – SAAR data is released at 10:00 am. Econoday consensus is 655K. May’s results were 626K.
- The EIA Petroleum Status Report for the week ending 7/19 is released at 10:30 am. Given resurgent rising tensions in the Persian Gulf in recent weeks, crude oil has reemerged as a proxy of sorts for those trading global political/economic stability and volatility. The EIA Petroleum Status Report remains central to gauging supply/demand but is increasingly less directly tied to the quickly shifting sentiments around energy – crude oil in particular. Inventories in last week’s report were mixed. Crude oil inventories contracted by 3.1 M bbl. However, gasoline inventories rose 3.6 M bbl. Distillates inventories swelled by 5.7 M bbl.
- Durable Goods Orders data for June is released at 8:30 am. May’s results were marginally disappointing at -1.3%. Econoday consensus for June is 0.7%. Ex-transportation M/M, 0.2%. Core capital goods M/M, 0.2%.
- International Trade in Goods – a very important data point in relation to our on-going conversation in regards the US/China trade talks as well as global growth, is due out at 8:30 am. May’s results reflected a deficit of $-74.6 B. Econoday consensus for June is $-72.5 B. May’s report reflected a gain of 3.0% in exports as well as a gain in imports of 3.7%.
- Weekly Jobless Claims for the week ending 7/20 are released at 8:30 am as well. New claims last week were 216 K. Econoday consensus is expecting additional tightness in the job market with a drop in claims that is expected to get the topline weekly claims number down to 210 K. The all-important four-week moving average stands at 218.7 K as of last week.
- GDP for Q2 (a) is released at 8:30 am. This data point has been confounding those that have repeatedly been looking for accommodation by the Fed in recent months. As you recall, Q1’s GDP results were significantly stronger than expected – coming in at 3.1%. This Q2 report is expected to reflect more modest growth, 1.9%. Real consumer spending however is expected to be significantly more robust that in Q1, 3.9% versus 0.9%. GDP reports, in addition to reflecting the rate of total economic expansion are looked at as an important means of measuring inflation. The GDP price index Q/Q change – SAAR in Q1 was 0.9%. The GDP core price index Q/Q change – SAAR was 1.3%. Econoday is expecting readings of 1.9% and 1.7% respectively in this Friday’s report.
Flickr photo: jbdodoane
Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the US markets open plus economic calendar, media, charts, Mark Sutin’s Insights and Sam Stovall’s analysis Subscribe