Fed Minutes and Chair Testimony Point to Lower Rates… Fed Chair Jerome Powell testified at the House Banking Committee and the Fed released the minutes of its latest meeting. Both emphasized greater risks to the economy.
What it means – Immediately following the last Fed meeting, investors felt confident about lower rates ahead, and they got more confident after May employment numbers showed awful jobs growth. Suddenly everyone whispered about a 50-basis point cut at the end of July. Then, the June fifth employment figures showed a snap back in jobs growth, which made everyone nervous… no rate cut, just 25-basis points?
Powell’s testimony and the newly-released minutes confirm that, even though unemployment remains low and GDP growth is acceptable, they still see significant risks in the global economic slowdown and uncertainty surrounding trade. They want to get in front of it, which means eventually cutting rates. The markets cheered, with the S&P 500 hitting fresh record highs.
Economic growth should be viewed in two segments – pre and post tech bubble.
Growth expectations must be dampened due to aging demographics, significantly higher debt and the lack of corporate spending on business development. Providing cheap and abundant money has not generated desired inflationary growth much less needed demand to justify corporate expansion. Stock buybacks have been six times greater than what has been spent on companies’ futures, i.e., product development or plant expansion.
Redbook, a Weekly Measure of Chain Store Sales, Jumped 6.2% For the First Week of July over Last Year… The measure is considered a precursor to retail sales which are due out next week.
What it means – We don’t normally comment on Redbook, but retail sales will take on outsized importance next week as we get closer to the first estimate of second-quarter GDP growth, due out at the end of the month.
The Atlanta Fed’s GDPNow model for expected growth ticked up 0.1% t0 1.4% after the Redbook report because it shows more consumer spending at the end of June and beginning of July. GDP will be an important metric for the Fed to watch when deciding to cut rates in July or wait for a subsequent meeting, and the amount to cut rates when they finally act.
If retail activity comes in strong next week as the Redbook suggests, investors might get nervous about the Fed cut and send the markets down a bit.
Consumer Prices Up 0.1% in June, Up 1.6% Over Last Year… Excluding food and energy, inflation rose 0.3% last month and 2.1% over last year.
What it means – Apparel will get the attention, since prices in that category jumped 1.1%, but that shouldn’t be the focus. Housing costs rose 0.3% as did medical care. Together, these two components make up 50% of the consumer price index and explain why the core numbers rose as much as they did.
Energy prices weighed on the headline number, but the world will focus on the core report because that’s what the Fed looks at when setting monetary policy. At 2.1% for the year, core inflation is right where the Fed wants it to be, but with the Chair’s testimony and the minutes from the last meeting, investors won’t look at CPI as a reason to doubt a rate cut.
ECB Minutes Show Bankers Focused on Economic Slowdown… The minutes illustrated why the central bankers forecast that they would keep interest rates at negative 0.40% at least through the middle of next year, they’re reacting to weak economic activity across the economic bloc.
What it means – What if you released economic information and no one cared? That could be a question that ECB members ask themselves, since no one doubted why they told the world they’d keep negative rates longer than previously expected.
With Italy breaking the budget deficit limit and Germany struggling with an auto sector meltdown after the emissions scandal, the economic bloc can’t seem to get its act together. The trade spat with President Trump doesn’t help, but it’s not a main cause.
To get to the root of the problem, the bankers have to look internally to its fast-graying population, which forces them to rely on exports for growth. That’s a tough model when the rest of the world becomes less interested in your stuff.
Even though the minutes reflect what everyone knew, they still give investors another reason to expect the euro to remain low against the dollar. And they give Trump another reason to accuse the ECB of tampering with the currency to encourage exports.
ECB interest rates remain at negative 0.40% after a decade of pumping money into the economy. Apparently, investors assume that not getting all of their deposit back in ten years is acceptable because deflation will replace their purchasing power. Since the bankers have not been right, perhaps the public is.
Trump to Use ‘Most Favored Nation’ Status to Demand Lower Drug Prices…Working on a campaign promise to lower drug prices, President Trump said he would craft a presidential order to demand that Americans pay the lowest price charged to consumers in other nations.
What it means – Drug prices are a weird thing. Americans pay higher prices than other nations, but we also have more choices, and we live in the nation responsible for the most pharmaceutical breakthroughs. The drug companies argue that without charging Americans more, they won’t be able to fund as much R&D, while every American would likely argue that the better path is for the drug companies to normalize the rates charged to Americans and other citizens, lowering our prices and raising theirs. The issue isn’t easy, given the pricing structures the companies must work within in different jurisdictions, but it’s not insurmountable, either. At the core, why should Americans be subsidizing the cost of medication in other developed nations?
Fed Chair Powell Calls for Moratorium on Developing Libra… Privacy and money laundering were two of the issues that Fed Chair Powell brought up when calling for Facebook to halt development of its new cryptopowelcurrency, Libra, until it could be properly vetted.
What it means – Facebook brazenly gave user data to marketing companies. Now people want to trust them with their cash? It seems ludicrous, but there’s no doubt that the ease of transferring funds across borders as well as stashing money in stable currencies will be very attractive to millions, if not hundreds of millions, of users.
No one knows what that will do to banking systems in fragile nations, or what kind of opportunity it will give bad actors. But by calling for a moratorium on development so that it can be studied is a lot like killing it by committee. The new digital currency, Libra, won’t have to pass muster in just the U.S., but in nations around the world, as well as central banks. It could be Libra-in-limbo for a very long time if Facebook heeds the call to stop development.
Data supplied by Dent Research/Delray Beach Publishing
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