Week ending 23rd August 2019.

Equity markets were dominated yet again this week by the US/China trade spat and speculation on central bank policy.

The minutes from the Fed’s July meeting were released on Wednesday (22 August 2019).  While they reiterated what Jay Powell, the Fed President, has previously said (i.e. the outlook for the US economy was positive and as such, the July cut was a “mid-cycle adjustment” and not the start of an easing campaign), interestingly, the minutes used the word “optionality” – which we believe is the Fed opening the door to additional interest rate cuts.

Although a number of Fed policymakers, including Eric Rosengren and Esther George, continue to argue against further US interest rate cuts, we believe that this is actually the start of an easing cycle and expect the Fed will cut interest rates again at their next two day monetary policy meeting on 17 & 18 September 2019, especially as the risks have increased since last month’s “mid-cycle adjustment”.  For example, the US and China have both upped their ante in their trade war spat; there have been additional signs of slowing global economic growth, particularly from China and Germany; and of course, as our colleague Jonathan Wiseman commented on last week (please see here), the yield curve has inverted.  Additionally, US inflation continues to undershoot the Fed’s 2% target.

Furthermore, a big clue came from Jay Powell when he spoke dovishly late this afternoon (Friday 23 August 2019) at the annual symposium of global central bankers in Jackson Hole.  While he repeated that the US economy is in a good place, he didn’t repeat the phrase “mid-cycle adjustment” and moreover in acknowledging the risks to the growth outlook, he said that the Fed would “act as appropriate to sustain the [economic] expansion”.

Unfortunately, this got overshadowed by China and a series of confrontational tweets from Donald Trump this afternoon.  After China announced plans for additional tariffs on US goods totalling $75bn, Donald Trump immediately responded saying the US would also increase existing tariffs on Chinese goods.  He also tweeted that the US didn’t need China and ordered US companies to leave China, which pushed global equity markets lower, reversing all the gains made earlier in the week.

This weekend we have the G7 summit in France.  Additionally, this coming week we have the Fed’s preferred inflation gauge, the PCE; the second reading of US Q2 GDP; and Eurozone CPI.

Investment Management Team