Stocks gained for the week, with the US market fully recovering losses from May and reaching all-time highs. With earnings results in a slow period, trade and interest rates remain the primary drivers of price moves. On trade, investors regained some optimism that progress will be made with China at the upcoming G20 summit. Meanwhile, Fed comments suggested an interest rate cut is likely at the next meeting, fueling an immediate drop in interest rates and the dollar while stocks were bid higher. Gold and oil rose due to heightened tensions in the Middle East and currency.
S&P 500: 2,950 (+2.2%)
FTSE All-World ex-US (VEU): (+2.9%)
US 10 Year Treasury Yield: 2.05% (-0.04)
Gold: $1,399 (+4.3%)
EUR/USD: $1.137 (+1.4%)
- Tuesday – ECB President Mario Draghi signaled the central bank may provide increased accommodative measures.
- Tuesday – President Trump suggested he may look into removing Fed Chairman Powell if he is displeased with monetary policy.
- Wednesday – The Fed left short term interest rates unchanged but signaled it was open to cutting rates in July. Stocks rose and bond yields fell.
- Thursday – Iran shot down an unmanned US drone, increasing tension in the region and boosting oil prices.
- Friday – President Trump said he called off a planned airstrike in retaliation for the downed drone on Thursday at the last minute.
We were in the minority by believing that the Fed would not cut rates this year, but this week the Fed indicated that there may actually be impending rate cuts, citing “uncertainties” and dropping the “patience” phrase from its language. A July cut is now very likely. If this does happen, we will be in an interesting phase where the market is reaching all-time highs and unemployment is around all-time lows, yet the central bank feels the need to be more accommodative.
It seems that after ten years of a bull market driven largely by monetary policy, the country has become addicted to low interest rates and demands them at the first sign of strain. For a while it seemed Chairman Powell would be more data-driven, balancing inflation and growth concerns equally. But if he succumbs to either political or popular pressure, this will no longer be true. The alternative is that the Fed actually does see significant slowing in the economy, but this would require an aggressive interpretation of the data.
While it’s true that official inflation remains muted, there are few people who would agree that is the case in real life. The longer-term results from sustained low interest rates in terms of either inflation or asset bubbles are impossible to predict. It could lead to heightened volatility down the road, but for now equity investors are cheering and the music plays on.