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Weekly Market Digest: What Should You Expect From the Fed?

U.S. stocks took a pause this week, coming off recent highs as investors digested a mixed bag of corporate earnings and the possibility for a Fed rate cut at the end of July. Bonds and gold both ended the week higher. Abroad, China reported slowing economic growth, while central banks in South Korea, Indonesia and South Africa began lowering interest rates. Foreign stocks were slightly down.

Weekly Returns:

S&P 500: 2,977 (-1.2%)
FTSE All-World ex-US (VEU): (-0.3%)
US 10 Year Treasury Yield: 2.05% (-0.07%)
Gold: $1,425 (+0.8%)
USD/EUR: $1.122 (-0.4%)

Major Events:

    • Monday – China reported weaker than expected economic growth, with GDP slowing to a 6.2% annual pace.
    • Tuesday – Facebook was questioned on Capitol Hill over its yet to be released cryptocurrency Libra, facing concern by U.S. senators over trust and potential regulation.
    • Tuesday – A number of major U.S. banks reported mixed earnings, with many showing slowing loan growth and declining net interest margins.
    • Tuesday – U.S. retail sales came in better than expected, rising 0.4% in June from the previous month.
    • Wednesday – The EU said it will investigate Amazon on antitrust charges regarding third party merchants.
    • Thursday – Boeing announced it will take a $4.9 billion charge in the second quarter due to the grounding of its 737 Max.
    • Thursday – President Trump said the U.S. Navy downed an Iranian drone in the Strait of Hormuz—a claim Iran has denied.

    Our Take: What Should You Expect From the Fed?

    Did the events of this week call rate cut expectations for the next FOMC meeting into question? To be sure, Chairman Powell’s comments have continued to hint at possible easing, and the market agrees with almost 100% certainty. In fact, current Fed Funds futures are even pricing in a 45% probability rates could be cut by 0.50%, rather than a more typical 0.25% move. So is this warranted?

    It depends on which way you look at it. For the most part, there are many positive data points out there. Just this week there were strong reports with respect to retail sales, factory output, and even unemployment, which still sits at historically low levels. Throw in a stock market continuing to push all-time highs, and the idea of a rate cut seems rather wild.

    But there are other factors at play. Corporate earnings have been a mixed bag, inflation remains muted, and there is no indication the trade war with China is anywhere near a resolution. So is this enough to warrant a cut? Tough to say, as it’s mostly predicated on unknown future outcomes, which is somewhat out of line with the Fed’s historical approach to these decisions.

    Having said all that, a single small rate cut is unlikely to spark any massive imbalance in the global economy, even if the timing eventually proves imperfect. So you could almost view it as an insurance policy, which is the way many will likely interpret the move. But as we pointed out in our latest Market Review & Outlook, it could also be a sign the Fed is growing more susceptible to political and popular pressure.

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